House of COMMONS









Tuesday 31 March 2009



Evidence heard in Public Questions 121 - 241





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Transcribed by the Official Shorthand Writers to the Houses of Parliament:

W B Gurney & Sons LLP, Hope House, 45 Great Peter Street, London, SW1P 3LT

Telephone Number: 020 7233 1935


Oral Evidence

Taken before the Business & Enterprise Committee

on Tuesday 31 March 2009

Members present

Peter Luff, in the Chair

Mr Adrian Bailey

Mr Brian Binley

Mr Michael Clapham

Mr Lindsay Hoyle

Mr Mark Oaten


Witnesses: Mr George Thomson, General Secretary, National Federation of SubPostmasters and Mr Mervyn Jones, National President, National Federation of SubPostmasters, gave evidence.

Q121 Chairman: Welcome to our second oral evidence session of our inquiry into securing the future of post offices and the post office network. We know you and your organisation well, but nevertheless I always like to begin by asking you to introduce yourselves particularly as you do not have name tags.

Mr Thomson: I am George Thomson.

Mr Jones: And I am Mervyn Jones, the National President.

Q122 Chairman: Thank you very much indeed for your written evidence to the Committee which of course is encapsulated, I think, in its entirety in the very good report you produced which you launched last week, thank you for that. Before I invite Brian Binley to ask the first question, can I just ask you what the timescale is? What is the urgency? The closure programme of the previous 18 months is now completed, we are down to a new and supposedly stable network, but fears are around about another round of closures, we are trying to forestall that, but are closures still continuing? What is the situation?

Mr Thomson: That is a very good point, Peter. Obviously we are glad the network change programme is finished, it was a regrettable but necessary network change. However, many subpostmasters are finding it really hard to survive, and there is a growing database that subpostmasters, the ones that are meant to be stable, are actually handing the keys in and are walking away. In addition to that, there have also been examples where subpostmasters have phoned up both the Federation and the Post Office and said they are having to close their office because the utility company has disconnected their electricity. On the evidence I have, it looks like one post office a day is closing as we speak, which is very, very worrying, after a closure programme.

Chairman: That is quite a high figure actually, Mr Thomson, I am interested by that.

Q123 Mr Hoyle: Is it just possible to ask, are there any new ones opening in other areas?

Mr Thomson: Seven or eight Post Office Essentials have opened, which is our new trial, not quite the full service. This is separate from the ones I have told you about closing.

Q124 Chairman: And one or two additional Outreaches have been opened, we have seen one of them ourselves in Devon, and some County Councils, I think Essex have re-opened one or two as well.

Mr Thomson: That is correct.

Q125 Chairman: But basically it is quite a worrying situation here, there is some urgency. Am I right in saying that the government is committed to maintaining the access criteria, which we were told would mean a network of 7,500 offices, but actually there is no obligation on them to re-open every office that closes unless the access criteria are breached?

Mr Thomson: That is absolutely spot on. The government have indicated they want the network to be round about 11,500 to 12,000 including the 500 Outreach offices. However, there is nothing in statute that makes them have to do that.

Chairman: Thank you very much indeed, I am grateful for that background. It does show the Committee that this is not an idle canter through the issue, there is actually some urgency in getting this mess sorted out.

Q126 Mr Binley: Just as a supplementary to your first one, geographically is there any difference between suburban, urban and rural areas, or are most of them closing in rural areas or suburban areas or indeed urban areas?

Mr Thomson: It is across the board, the offices that are closing. The reality is that postmasters' salaries have been growing slowly, but the cost of running the post office has been going up quite dramatically, which means that many of them physically cannot make ends meet, that is the reality. They want to serve the public, they want to serve the community, but they physically cannot afford to remain in that post office providing that service to the public.

Q127 Mr Binley: I understand that, thank you for that, I am most grateful. Can we then talk about the revenue that subpostmasters get from mail services? It is a very crude and wide question to ask, but how much revenue do they get from mail services? Give me the answer in your own words obviously, because it is such a big question, but you might help us to start with in that respect.

Mr Thomson: This is an absolutely key figure. Postmasters last year received, for the mail they do on behalf of Royal Mail Letters, £165 million commission. Now that is commission. I think what is more worrying is that postmasters are paid by commission and also a fixed element, but when you factor in how much Royal Mail Letters are paying towards the fixed pay element as well, that £165 million goes way through £200 million, and I think it is fair to say, without any fear of contradiction from anyone in the UK at any level, that subpostmasters, in terms of their commission, which is variable pay and fixed pay, receive more than 50% of their salary from Royal Mail Letters. Absolutely massive.

Q128 Mr Binley: Let me qualify salary, because these are small businesses, are they not? Do you mean their total income?

Mr Thomson: Remuneration from POL. More than half of the remuneration from POL to subpostmasters comes from the money that Royal Mail Letters pays POL.

Q129 Mr Binley: I am very grateful for that. That is very helpful to us. Would you like to add anything to that, because you are on the other end of it, are you not? You are on the receiving end of that, as it were.

Mr Jones: One of our major concerns is the inter-business agreement between Post Office Limited and Royal Mail and the future of that agreement, particularly in light of the Hooper report, and the prospect of both companies becoming sister companies, that relationship is key to the success of the network. One of the grave concerns we have is that there is talk at the moment of that being a five-year contract. That will then create great uncertainty for subpostmasters who seek to take out long-term mortgages to buy their businesses; many of them have homes attached to their post offices, so they are working on 25-year loan plans, and to have this uncertainty arising every five years will undermine first of all the value of subpostmasters' investments and actually call into question whether or not they would be prepared to invest in the businesses for the longer term, so it is a very big issue for us.

Q130 Mr Binley: Mr Chairman, may I just touch on cashflow? I do not want to tread on anybody else's feet, but we have talked about over 50% coming from Royal Mail to subpostoffices, how does that impact upon your cashflow? Do you have it regularly, do you have it upfront and early, how is it paid? Because cashflow is a vital part of a small business, is it not?

Mr Jones: Of course it is, and we find there are seasonal trends in cashflow, for instance subpostmasters get an income from Bureau de Change and travel money, which obviously is falling at the moment due to the exchange rates and less and less people going away to Europe on holiday. Traditionally, we had a rise in income in the summer for those offices that offer that service, and then obviously at Christmas we had a fairly decent injection with the Christmas mail. But we are concerned that the fluctuations now seem quite a bit bigger. In the summertime, as foreign exchange sales fall off, if you like that injection will come just in the way it has in the past. We are very concerned about subpostmasters' income though. The key to this is not necessarily the average subpostmaster's remuneration is increasing, the key to this is profitability is falling, and we need to recognise that only 45% of gross income from Post Office Limited actually flows down to subpostmasters, who actually conduct 80% of the work, and simply by giving contracts to Post Office Limited does not necessarily mean that you are creating a viable network for the future. We need to ensure that not too much of that contract price sticks in the pipe, but flows down to subpostmasters to enable them to invest for the future and generate an income.

Q131 Chairman: You claimed a very interesting figure, that subpostmasters do 80% of the work.

Mr Jones: That is my understanding.

Q132 Chairman: How is that figure derived? Is that a guesstimate or is there any evidence to support it?

Mr Jones: I am sure the Post Office will give you the exact figures, but our estimates are that of the Crown offices and the other franchises, the 12,500 subpostoffices are responsible for 80% of the work but receive 45% of the gross income that the company actually generates.

Q133 Mr Binley: Thank you. Forgive me on this cashflow thing, but yes, profitability is very important, of course, but if profitability is going down and cashflow is intermittent, that is a policy for disaster for some people, is it not?

Mr Jones: Absolutely. Rising costs and falling income, that is the position we find ourselves in, and buying a post office is no longer seen by many people as the sound investment it was ten years ago. Many people are finding it difficult to sell their businesses on to retire, and we have many instances of subpostmasters being unable to move on.

Q134 Mr Binley: I do not want to go any further, but I have the point I want. Profit and cashflow are not the same thing, and we need to understand that, for small businesses particularly. Can I go on to my second question? Considering the implications for some subpostoffices of POL efficiency drives, which will close sorting offices in rural areas, are network decisions being driven by what makes money for POL, not what makes financial sense for subpostoffices? Is there a problem there?

Mr Thomson: One of our big worries regarding the Hooper report and the Postal Services Bill is the point you made there. Over 900 sub offices also have an attached mail work delivery office and in Europe, when there has been a rationalisation within the mail company, there has been a rationalisation of delivery offices. Our big fear is both income streams, from both running the delivery office and running the post office, are needed to keep that facility in the community, and if one of the income streams are taken away, ie running your sorting office, then the whole shooting match may have to close down. So we are very concerned, and Mervyn has alluded to it already, subpostmasters need more of the money that is paid into POL coming right down the pipeline to pay them as well, because the pressures of actually running a post office financially are getting harder and harder. Now obviously there has been some good news in the last few months, the Post Office Card Account was very good news, we will touch on that later. A lot of nice warm words have been talked about for the future. But when we come here today, we do not want nice warm words off the government or off the opposition, we want action on the ground. I know you will touch on it, colleagues, but it really is surprising that the Hooper report analysed in-depth Royal Mail Group excluding POL, and we feel that was a glaring omission to ignore POL when it actually does £1.5 billion worth of work for Royal Mail Letters per year, and that POL receives £356 million a year from Royal Mail Letters. Now to omit that from a structural review of the whole company quite frankly is a glaring omission.

Q135 Mr Binley: My final question: can I ask why you feel so strongly about the possible separation of Royal Mail Group and POL, specifically how would such a change, and I quote now, risk a reduction in POL's and subpostmasters' income, which is what your submission says?

Mr Thomson: There are two or three points. First and foremost, the National Federation of SubPostmasters welcome many of the facts and figures and many of the analyses that come out of Hooper review and the Postal Services Bill. We support the pension deficit being taken over by the government, because quite frankly if it was not, then Royal Mail Group would be bankrupt, so we welcome that. We welcome PostComm being discontinued and Ofcom taking over the functions of PostComm, because PostComm concentrate too much on competition at the expense of universal delivery, that is definite. We support Ofcom having the ability in the future to levy other letters carriers to make sure that universal service is protected, and when it comes to private capital, the Federation view is that we do not have a problem with private capital coming into Royal Mail Letters; we think it should be a British company rather than a foreign postal operator, but we do not have an issue with private capital coming into a public company, because after all, our members have £2 billion of private money tied up in POL, providing the bricks and mortar for POL, so we do not want to be hypocritical, but the reason we feel that there are difficulties here is once you take Royal Mail Group as a separate company from POL, because that is what the Postal Services Bill is saying, and you have Royal Mail Holdings above that, even if you have an initial deal, I think there will be massive pressure in the new Royal Mail Group to actually try and cut the 356 million they pay as the inter-business agreement. One way round it, for example, quite easily, if I was a manager in the new Royal Mail Group, I would say to myself, wait a minute, we are paying Post Office Limited £356 million; if we put prepaid postage packs in every supermarket and every garage and people can just put it in, pricing in proportion, post it anywhere, I reckon quite easily I could reduce subpostmasters' income, even if you had an inter-business agreement, by £50 million or £60 million. So we need guarantees here today, we need guarantees from this government regarding what they plan to do with the Royal Mail Group and POL and Royal Mail Holdings. I have said before, colleagues, we have had a lot of nice words but we have had absolutely no concrete actions whatsoever.

Q136 Chairman: Can I just test you one more time before I hand on to Michael Clapham? Given that Royal Mail and POL have effectively separate boards at present, surely that pressure is there now?

Mr Thomson: The reality is it really is not, because we are part of the same company, Royal Mail Group. At the moment, POL --

Q137 Chairman: You will still be part of Royal Mail Holdings --

Mr Thomson: My understanding in reading the Postal Services Bill a good few times is that Royal Mail Holdings would be a very small company, and I think it would be very, very easily taken apart within a very short period, so it is there but to all intents and purposes we would become two separate companies. The worrying aspect is that at the moment, when we have the inter-business agreement, because we are part of the same company, Royal Mail Group, procurement law does not come into play very high up. Once we become sister companies, ie two separate companies, all of a sudden any deal that POL and Royal Mail Group do together, they will have to have one eye looking over their back in case other companies say it is anti-competitive. If you are part of the same group, you do not have that problem, but when you are actually a separate company, that is what we are talking about here, separate companies, you do not have that protection, and procurement law will come into play as well regarding the inter-business agreement.

Q138 Chairman: So you are frightened of free and fair competition?

Mr Thomson: We are frightened of nothing, but if you are part of a company and you are a physical cost on the ground anyway for that £356 million, at the moment, it would be stupid Royal Mail trying to take too much work away from the network, because they have to pay for the network anyway. If you do not have to pay for the network because it is a separate company, you do not have that consideration.

Mr Jones: Can I just also make the point that we are not frightened of competition, what we are frightened of is uncertainty, and planning small business for the future. We are dogged with uncertainty and have been now for the last ten years. We have had two closure programmes. We are not quite sure if we are getting the Post Office Card Account. We see the effects of direct marketing from the Department of Transport and others. We lost the contract for television licensing. And all of these things, when you have no control over your margin - and this is very, very important, subpostmasters have no control over their margin. We cannot put our prices up to make our business profitable. We are relying on the contracts coming through to Post Office Limited and then getting a fair proportion of that money flowing through to the network, and clearly it is not happening.

Chairman: I did warn my colleagues that every question is linked to every other question on this subject, and I think we are at risk of taking almost all Michael Clapham's questions away from him by the questions we have asked already. I think there is a real risk of that. I still think there are some questions that he wants to ask, I hope at least.

Q139 Mr Clapham: Just exploring that issue of profitability of subpostoffices a little bit further, we know there is only a small proportion, according to POL, that are profitable. What are the features that you see that sort of make a post office profitable? Here we are talking in terms of profitable both for POL and for the subpostmaster.

Mr Jones: Right, because the two things can be in conflict, and what is profitable for Post Office Limited may not be profitable for a subpostmaster. We need to be able to identify clearly that at the moment there is a conflict between the two aspects, because the more Post Office Limited can squeeze away from the network to enhance their profitability and meet their core costs, the less comes down to subpostmasters. So in answer to your question, what I am finding now is the most successful people who run post offices have a very strong retail offer attached to their post office and, going forward, subpostmasters have to look at where is the greatest potential for income growth for their business, and many of them are finding that it is actually not from within post office income, but it is driving sales in their private businesses, and that is where subpostmasters increasingly have to turn their attention.

Mr Thomson: In addition to what Mervyn said, Post Office Limited have basically said that an office has to have a salary about £58,000 to be profitable for POL. One of the things we had during the closure programme was that an income way below that from the post office, if it is combined with a newsagent or a retail shop, could make that business very profitable for that individual subpostmaster running the business at an income level way below that. That was one of the issues during the network change closure programmes, that subpostmasters who believe that their business was intrinsically profitable were being closed. That was one of the big issues that we had, so if you run a post office with a good small shop, you can make money at a level significantly below what the Post Office thinks a break-even figure is.

Q140 Mr Clapham: So the main feature in terms of the subpostmaster really is the associated retail business?

Mr Jones: I would not say it is the main feature. I think what we need to recognise is that the two income streams, there is a synergy between them, and that as people come in to visit the post office, obviously they spend money in the shop, and one of the big concerns we had over the network change programme, and indeed what is amounting to, if you like, an unstructured network change programme, in that people are handing back the keys, we are particularly seeing where it is the last shop in the village, that if the income stream from the post office declines, the viability of the whole business falls, and that service is lost to the community. That is particularly true in rural areas, and there are many instances, particularly in Scotland, in the Highlands, where if you take one strand of this business away, then the other ceases to be able to generate enough income for a family to make a living from, so it is a very big problem.

Q141 Mr Clapham: Do you feel that POL is doing enough to help and encourage subpostmasters? Is there much more that they could do, and if so, what are some of the things that they might be able to do to actually support subpostmasters?

Mr Jones: Well I think the biggest issue for me is Post Office Limited's core expense, and the cost of actually running the company. What we would like to be able to do is be able to work with Post Office Limited to find a way of trying to reduce those costs substantially, but also to ensure that part of those savings flow down to subpostmasters, and are simply not held in the centre. It is a major concern, but if Post Office Limited is going to be compared to another franchise model, I do not know of many franchisors who retain 55% of gross income to maintain their service provision to the franchisees.

Q142 Mr Clapham: In terms of that proportion, what discussions have you had at all with POL? What is their view when you put to them that the proportion that is taken actually sort of undermines the viability of the post office?

Mr Thomson: We have to be careful here. Could POL run a more efficient ship? Yes, they could. However, and it is a big however, they are a company that has to keep 8,000 branches open that lose money for them, only 4,000 branches make money, so any company that has to keep 8,000 offices open for a social aspect for the communities, then obviously there are going to be income ramifications for that. I have been in the post office industry, Royal Mail Group, for 30 years, and apart from the fact that we used to have prefunded money from the DWP, which made us tens of millions of pounds a year, Post Office Limited, if you exclude that £20-30 million they made in those days of the DWP money, has never made money in 30 years. It was only because of the overnight cash loadings at the DWP, when they used to have to prefund the benefit books, so POL have never been a particularly successful company because we have to keep 8,000 offices open that any other company would close, but could they cut back on their costs and give more to subpostmasters? In our view, absolutely.

Mr Jones: It absolutely has to happen. We need, as an organisation, to be in a position to co-operate with Post Office Limited to ensure that that happens, and we probably do not engage with them the way that we should on that particular issue. We are not encouraged to engage with them the way we should on that particular issue, I think it is fair to say.

Q143 Mr Clapham: Just looking at that encouragement and thinking in terms of what you said earlier about the post office and the associated retail businesses that many of them benefit from, given that retail businesses are open much longer than post offices are, has it ever been discussed with POL about extending the hours of the post office to sort of marry up the hours of the retail side of the business?

Mr Jones: To be frank with you, I was in exactly that position in my own office. We had a situation where a major supermarket chain actually put the post office out in my local town, so as a result my business became much, much busier, and I increased my opening hours substantially, and discovered that although the post office income went up substantially, the cost of delivering that service in terms of staffing hours meant that I actually lost money and had to revert back to my original hours. Now there are some solutions now in place, particularly combi till, where you can multi-function your staff, and there is opportunity to increase those opening hours, but the staff have to be able to multi-function and do the shop and the post office together. So we now have these what are called combi tills which generally cost subpostmasters between £6,000 and £8,000 to install and can extend their hours. For instance, my convenience store is open from 7.00 in the morning until 10.00 at night, but we only offer a post office service between 9.00 and 5.30. Although it is perfectly feasible to be able to offer it beyond that, but the cost of the initial investment and then managing the staff and making sure that it is run properly obviously are big issues for subpostmasters.

Mr Thomson: Notwithstanding what has been said, we have to be careful here, because running a post office is very different from running a convenience store, and Mervyn is quite right, many of us do both. However, post office staff are trained to a far higher level, they sign the Official Secrets Act, we make sure that there is cash delivered by the post office, we have a secure professional environment where people can be served at the post office, which goes way beyond being served by the Saturday girl, a 15-year old in a convenience store, who then finds out all your business, so I think we have to be careful here. We still believe in big brand. What big brand means in effect is a subpostmaster can earn a significant part of his income from running a post office, not all his income, and I am concerned that in the future we try and go down this road that a post office is just like another convenience store, it is not, and that someone should maybe earn a small sliver of their income from running a post office. That is not the way to have a professional post office service in the UK. If we go down that road, it is the road of dumbing down and it is the road of worse service, so we have to make sure that the strengths of the post office network are recognised. They are not just convenience stores, they provide specialist help, specialist information, and a safe, trustworthy environment for the general public.

Mr Jones: Perhaps I did not make myself clear as well. The combi till service we would look to offer as an extended service when the post office element of the business was actually not operating, it would be the type of place where somebody could come in, post letters, and conduct not every type of service but perhaps 70% of services that were previously available at the proper post office counter.

Q144 Mr Clapham: In terms of the network subsidy payment, would it help if that was allocated in a different way, for example if it was allocated to individual post offices, would that be a benefit?

Mr Jones: I think it is essential that there is a clear line of sight for what the taxpayer is actually buying for its money, and this £150 million is in the post office central accounts, and one of the concerns subpostmasters had is they felt they did not see any benefit from it. Subpostmasters' pay did not jump up £150 million when the subsidy kicked in. It is all in people's perception. If there was, for instance, a line on the subpostmaster's payslip to say, "We, the taxpayer, feel that the service you provide is of value to the community", and the taxpayer is prepared to contribute this much, it is actually a line on the payslip, this is what the £150 million is buying, that illustrates to the government exactly what they are getting, and it also says to the subpostmaster, we value what you do within your community, because that is very, very important, you know, people often say they value what subpostmasters do, but actually when it comes to paying for it they are very reluctant to stump up any money.

Mr Thomson: The other point is subpostmasters have always said that we want to be paid for work that we do, we do not particularly want to be subsidy junkies. I think one of the big issues that is going to come up in the future in terms of new government work, and I know you are looking at it, let us take the Post Office Card Account for example, this is a perfect scenario where we want to be paid for the work we do, and then you factor in the subsidy. The old contract for the Post Office Card Account was £200 million per year. The new contract, starting this year, 1 October, is £80 million a year. Now you do not have to be a genius to work out that is £120 million a year less. How much more sensible would it have been not to ruin either subsidy but for the government to pay realistic rates for contracts that they give you? Now that is the reality. That is taxpayers' money going round and round, and it makes no sense. I could argue that in effect that one decision alone has, if you like, done away with the SNP, that is the reality, because that £120 at the moment is roughly equivalent to the social network payment.

Q145 Mr Clapham: Just finally, Chairman, the issues that we are now discussing, have these been raised in your discussions with POL, and if so, what kind of response do you get?

Mr Thomson: The one issue regarding the Post Office Card Account contract, the tendering process was scrapped, and of course being a Scotsman, I made the point that we would like it still to be £200 million. We were told quite clearly that although it was good news the government awarded it to POL, that if it was not in the region of £80 million then the contract would not have been awarded. So on that point alone, there was very little that we could do. It was quite clear that that was not if/or. It was: you are going to get it but you are going to get it at £80 million a year, not £200 million.

Mr Jones: If I could just make that live for you a little bit, subpostmasters currently get paid 15p for every £100 that they pay out in a Post Office Card Account transaction. That means if they do 100 transactions an hour, they are making £15. Well, it is a physical impossibility to do that number of transactions in an hour. When you take into account any staff costs and overhead that you have, it illustrates the problem we have in terms of profitability. 15p per £100, if a clerk makes a £10 mistake, then they are working for the next hour and a half to try and recover that. So the margins are so slim now in the profitability, without a strong associated retail offer, it is extremely difficult for a postmaster to survive. There is one other point that I feel I should make at this point. The subsidy that exists, I prefer to call it a payment for services, because any other commercial entity would close these 8,000 post offices that lose money, and I do not believe that it is a subsidy, I believe that the government, as they do with local GPs, are saying this is of value in the community, this is how much we are prepared to pay for this service, and it is a perception of how it is presented. One of the key elements in subpostmasters' pay structure is the busier that you are, the less money you make proportionately. So if you take a subpostmaster who is doing, for instance, work that generates £30,000 a year, a subpostmaster who does twice that work would not generate £60,000 a year, he would probably generate £45,000. So there is a bend in the scale, and the higher up the scale you go, the less you actually make proportionately. In essence, what is happening is that the busy parts of the network are subsidising the loss-making parts, so there is very little incentive for subpostmasters to want to move up the chain and buy busy offices, because offices in the middle and at the lower end of the chain actually are more profitable than the very busy offices at the top in a lot of cases.

Q146 Mr Oaten: Can I just check a figure? You said 8,000 are losing money, did you mean 4,000?

Mr Jones: No, 8,000.

Mr Thomson: 4,000 make money, 8,000 lose money.

Mr Jones: Two-thirds of the network lose money.

Q147 Chairman: Can I just ask for some additional evidence from you, please? The combi till, we have heard about it, we have no evidence about it, we will ask POL about it. I think it is rather an important issue, because PayPoint, for example, make great play of the fact that they can offer their full service of bill payment services throughout the hours of the convenience store being open, whereas the post office cannot, and therefore they say they offer a much better service to disadvantaged customers, for example people topping up their prepayment cards or their electricity meters, because they can operate 365 days a year throughout the entire opening hours. This combi till, I take the point George is making about not wanting to offer a substandard service, but offering a core service in core hours and a reduced service outside seems an attractive way forward to square the circle.

Mr Jones: I absolutely agree, and subpostmasters cannot bury their heads in the sand. Customers are demanding, if we open our businesses, why on earth should the post office not be open? The staff are there anyway. It is a question of putting in place the necessary checks to ensure fraud prevention, and to make sure that customer service is of a level which is satisfactory when the subpostmaster physically cannot be there. Now internally for accounting processes, many subpostmasters like to be there when the post office is open, or when the service is being offered, because obviously there is a high risk of theft and fraud, and it is encouraging subpostmasters to be aware that if we are going to compete in the marketplace, we need to offer these services on much longer hours, and to teach them to manage their businesses rather than have their businesses managing them.

Chairman: We will ask POL as well for some additional evidence on combi tills, but it would be helpful if you could give us a note about them as well and the role they can play in extending opening hours.

Q148 Mr Bailey: Just further exploring this relationship between the subpostoffices and POL, on the basis of what I have heard from you so far, would it be reasonable to say that you actually have a situation whereby POL is unprofitable because two thirds of its subpostoffices are making a loss, and you have subpostoffices making a loss or not doing so well in part because of the restrictions placed upon them in their contractual arrangements by Post Office Limited; not exactly a happy sort of relationship, is it? Would you comment on that?

Mr Thomson: Well, on the restrictions policy, I disagree that Post Office Limited are doing anything wrong with the restrictions policy. I think it is important, let us take the example of travel insurance. Travel insurance is one of the biggest items sold over the post office network, and I think it would be a nonsense, for example, if a subpostmaster could source a third party travel insurance and sell it against the Post Office's own brand, so I think it is important that there are certain transactions that the Post Office tender for and win contracts at a national level that they can then give to every subpostoffice. This goes back to when the Association of Convenience Stores put a complaint in to the Office of Fair Trading, and on 22 May 2006, so about three years ago, the Office of Fair Trading said that an investigation was unjustified, in other words for reasons of general economic interest, that what the Post Office do to win contracts to put throughout the national network is important to make sure that subpostmasters can get an income, to make sure that Post Office Limited can provide a nationwide presence out there. So we think the restrictions policy is the right thing to do. There have to be core products that Post Office Limited use subpostmasters to sell, and that is fundamentally important, because I think people have to be careful. It has been said over the last three or four years that all the problems facing the post office network could be resolved if subpostmasters somehow could access goods and services wherever they wanted to do that. That would not solve the problems of the post office network. In fact, let us take PayPoint, Peter alluded to PayPoint earlier on, let us take a situation. Post Office Limited about three years ago were seriously looking at coming out of the bill payment market. At that time, we had 14,000 offices. Now bill payment pays subpostmasters about £40 million a year. If the Post Office came out of the bill payment market, PayPoint may have taken 4,000 of the top offices and had them as their outlets, but that would have meant at that time something like 10,000 post offices would not have had bill payment. In other words, these offices would have become less viable, their future would have been undermined, and Post Office would have started to lose even more money; subpostmasters would have lost more money, and there would have been big gaps developing in the network. So I think politicians have to be very careful. The restrictions policy is there for a reason, it is to provide a uniform service throughout the UK, and the Federation supports section 17, and we support the restrictions policy, absolutely.

Mr Jones: Can I also just make the point that I have been a subpostmaster for 27 years and I feel a tremendous sense of loyalty to the company. As subpostmasters, we have an integrity within our communities that is held in a very high regard, and I think we all saw that from the last closure programme, exactly what the public think when their local post office closes. It is important that subpostmasters recognise that we have a role to play in making this company profitable. The cost of the 8,000 loss-making offices is a service to the communities that government have to recognise and be prepared to pay for going forward. My major concern is now that because the government do not particularly like the idea that they are paying £150 million a year, that subpostmasters and the profitability of the company is being squeezed, and that any resulting profit that the company make will be offset against a reduction in the social network payment. So, for instance, in two or three years' time, if the company makes £40 million profit, the SNP will fall to £110 million, and subpostmasters cannot see any benefit going forward, because we are last in line to see any profitability coming through. So again, this adds to the uncertainties that subpostmasters feel.

Chairman: I am going to extend this session beyond 11.30, but not for too long. We are in danger of repeating some of your earlier evidence, you have made that point already.

Q149 Mr Bailey: To summarise, in effect, you do not think more commercial freedom for the subpostoffice will basically be of benefit, either to POL or ultimately to the actual subpostoffice itself?

Mr Jones: I think there are instances where we could explore alternatives. I mean, for instance, we have a subpostoffice in Scotland where the subpostmistress is also the local registrar and the local council trained her to become a registrar, and she offers that service. We have post offices that are police stations --

Q150 Chairman: We are moving on to other services next, I would rather talk about the competition here.

Mr Thomson: Can I read a little bit from the Performance and Innovation report of June 2000? This was about the restrictions: "While some individual subpostmasters might gain from a relaxation of the restrictions, the post office network could lose out. The Post Office pay some subpostmasters less per transaction than they would get by negotiating directly with the Lottery operator or other clients because it uses the revenues it receives to make cross subsidies to less profitable parts of the network. Without the restrictions, these cross subsidies could not be maintained and it would be more difficult to sustain the current size and shape of the post office network." That went back to the Performance and Innovation report in the year 2000.

Q151 Mr Bailey: Can we just move on to a slightly different subject? The NFSP is the organisation that negotiates on behalf of subpostmasters. Do you believe that you can achieve the most appropriate payment structure for services on behalf of subpostmasters or is there a possibility of changing that?

Mr Thomson: Well, we negotiate with the Post Office every year both on pay and on conditions, and obviously, negotiating with a company that is technically or virtually insolvent, it is always difficult to get money from them. I know there is a debate that Post Office Limited now make money, but if you factor out the subsidy -- so it is always difficult. In fairness, I think we have found it very difficult to get reasonable rises on people's remuneration over the last two or three years, because the costs of running the business are outstripping any rises you get, so there is not a magic wand, we continually do the very best we can for subpostmasters to leverage as much as we can out of POL and Royal Mail Group to make sure that they can run a business, but it is very, very difficult and it goes back to people handing their keys in because they can hardly make any living.

Q152 Mr Bailey: Can I just conclude: what is your relationship with people providing partner outreaches or franchises?

Mr Thomson: Well, the vast majority of the people running the outreach services, which is the mobile vans, it is the satellites and outreach, the vast majority are members of the Federation. Virtually everyone has a core office, their main office, where they are the subpostmaster, and they maybe run one or two outreaches from that office or they may run the mobile van which stops at seven or eight villages. So we spent a lot of time last year on a contract to make sure that it was worthwhile for our members, and we had difficult discussions with Post Office Limited, and we enhanced what was on offer to make it worthwhile for our members to run these satellite offices.

Mr Jones: But we remain unconvinced about the commercial viability of the core and outreach model. I am getting some anecdotal feedback from subpostmasters who are operating the model that would illustrate that perhaps it is not as profitable as they initially envisaged.

Q153 Mr Oaten: I want to come on to the kind of services you can run in the future, and I am fascinated by the Scottish model of running weddings as well, the prospect of the bride saying, "Till death us do part and can I have 12 second class stamps please" at the same time. First class. They will be on honeymoon so they will not mind when the letters get there. But let us just look at the existing service and how you have quite a range of post offices in their size and what they can actually deliver, and I think about some of the rural post offices in my own constituency. What would you say is the core bare minimum service that a small post office should actually be able to run at the moment?

Mr Thomson: Well, very much what we have at the moment. The Post Office Card Account, for example, doing services on behalf of partner banks; the mail provision is absolutely fundamental, doing the work for Parcelforce and Royal Mail Letters, these are absolutely the key things that we do. Some of the bigger offices -- at the moment you have, for example, DVLA, driving licences and taxing your car is only done at 4,500 offices. Doing your passport is only done at about 3,000 offices.

Q154 Mr Oaten: It a problem that you have, in a sense, customers going around not quite knowing, when they go into a post office, whether it can do X, Y or Z?

Mr Thomson: It is a problem but it lies with the clients. For example, DVLA will say to the Post Office, we only want the service to be available in 4,500 offices. Our policy in the National Federation of SubPostmasters, we believe that every service should be offered at every post office, but we do understand that for some of the new services that may be coming on, for example doing the plastic driving licences, photographic, that you may have to use some of your bigger offices to do that.

Q155 Mr Oaten: I am still not quite clear -- if I were to go to any post office, however small, in the country, can I guarantee that I am going to get four things, definitely know that those four services are going to be available, however small it may be?

Mr Jones: It depends what the four services are.

Q156 Mr Oaten: That is the problem, is it not?

Mr Jones: There are services that are available at every post office. The problem is that a lot of this is client driven. For instance, with the passport application process, the Passport Office will not supply passport forms to every post office because it is too expensive. The problem is that the customer does not understand that, and when he goes to his local post office and asks for a passport form and cannot get it, it leads to frustration and argument at the counter. There has to be a recognition by the departments that while it may be cost-effective not to supply them to every office, it is actually what the customer wants, so where do you get that balance and where do you draw the line? Because subpostoffices are like every other business, they are customer driven and we cannot meet the requirements of the customers because of the policy of the client to Post Office Limited.

Q157 Mr Oaten: Let us put it another way then. Can I at least guarantee that I will be able to get some stamps in every single post office in the country?

Mr Jones: I would certainly hope so.

Q158 Mr Oaten: That is one thing then, is it not?

Mr Jones: Yes.

Q159 Mr Oaten: Can I at least guarantee I will be able to send Recorded Delivery in every post office?

Mr Thomson: Yes, you would.

Q160 Mr Oaten: So we have two core services.

Mr Jones: I think I would break it down into mails, banking, which would be your Post Office Card Account and access to some of the partner banks.

Q161 Mr Hoyle: There are lots of services.

Mr Jones: There are many, many more than four. I think we tend to concentrate on the negative. Most services are available at all post offices, that is a factual statement. The things that are client driven -- for instance, you cannot get your car taxed in every post office.

Q162 Mr Oaten: I am just trying to get a sense of what are the core things that you can absolutely guarantee that every single post office has, and you could probably give me a list.

Mr Jones: We certainly could.

Q163 Mr Oaten: That would be useful to understand what the basic core is. Let us just look on to the future and some of the recommendations you have in the six steps for a sustainable post office. You talk and the report talks about the great potential there is to take on quite a lot of services provided by central government and local government, and in it you talk about maybe being able to house JobcentrePlus terminals, being able to run the administration of the Department of Work and Pensions social fund. You even talk about, if they ever come to light, being able to do ID cards and biometric passports. Are these really realistic services that you could be able to provide?

Mr Thomson: Well, they are more than realistic, because last week there was an announcement by the DVLA and the Post Office that 750 of the largest offices will actually do the ID cards for the DVLA, in terms of renewing them, so the technology is about to go in place, so it is absolutely realistic. I think there is a big issue here. Local authorities, for example, and government, they have best value, and many local authorities have pushed people towards direct debit for paying their council tax and their rent or whatever. They have been doing that for many, many years. The problem we have is that the physical post office network should be treated equally to any other outlet, any other way, for example, of internet or telephone or direct debit. The local authorities should treat it as an equal choice, and I think what concerns me is if you look at some of the tenders that go about, it is the most economically advantageous tender, the meat tender. I believe when it comes to local authorities looking at putting work through the post office network, you should be looking at the most economically advantageous price. The Post Office will not always be the cheapest price, in particular when you have PayPoint paying their agents next to nothing, it is very difficult to compete with that kind of cost, but when the government and local authorities start looking at work in the future, and I hope your Committee, you should be looking at what is the most economically advantageous price which takes in the whole holistic approach of if, for example, a post office closes and the old woman has to go five or six miles to get her benefit, have you taken that into account? Or if someone who can no longer buy their groceries in the last shop in the village because the post office has closed down, if that person loses their independence to actually stay in the community, how much does that cost society? So when the government and local authorities actually start looking at the post office network in the future, price is important, of course it is, but it should be the most economically advantageous price.

Q164 Mr Oaten: Let us imagine all that is true, and there is a big increase in the amount of services which can be put into post offices. If that came true, would that mean that you would not be talking about 8,000 post offices which are not profitable, would it suddenly start to make them profitable if you got these services?

Mr Jones: Profitable to whom, is my immediate response to the question. Post Office Limited --

Q165 Mr Oaten: Well, to POL and then to the subpostoffice themselves. Let us deal with POL, would it make it profitable to them?

Mr Thomson: It depends about income. The post office network have always had large parts of the network that have been unprofitable, but if the centre is generating enough income, for example when we had £400 million a year from DWP for the benefits, when the centre is profitable, it can afford to keep all these offices open, and it does not need to talk about losing money or not. When things become far harder, that is when they actually work out, and they have had to do it for the social network payment, that 8,000 offices are losing money. Now undoubtedly if you bring more work into the network, the percentage of offices losing money would drop, that is common sense. It would not disappear, but if you can bring in volumes of work, it means many of these offices that are loss-making would go into profit. Not all of them, it could be 1,000, 2,000 or 3,000 more. So the key is for the government to start putting work into the post office network. We have had this for a long time. The post office network for 20 years from all political parties has been seen as a problem that we have to solve, rather than a national asset that could be utilised, and I said it last week, if you think about this logically, when we had the situation with the banks in October, the banks were within one or two days of going belly up, at least for a period of some weeks. 22 million people in the UK received benefits and allowances either through the post office or through automatic credit transfer, and there could have been a period where the government would have had to have provided every benefit recipient in the UK with their money through the post office in a national emergency. Now that could have been done, because we have 12,000 branches, and it could have been done because we have a cash in transit mechanism. So it is not just about goods and services, this is a national asset which is part of the economic infrastructure of the UK.

Q166 Mr Oaten: So it could make a difference but not such a big difference that it would turn all of them around into profit; some of them would be turned into profit?

Mr Thomson: Absolutely.

Q167 Mr Oaten: What is the impact then for the individual subpostoffice, and particularly how should the funding be put in place for the subpostmasters, particularly given the fact that to do some of these things, particularly if you are getting into biometrics, a massive investment of technology is needed and a massive investment of training and staff time as well, so who is going to fund that, and is that going to end up really making life harder for the subpostmasters, are they going to see any profit out of this?

Mr Jones: I think the answer to that question lies in the fact that only 750 post offices will get the new photocard driving licence application process, and that is out of a network of 12,000, so whether it is going to be a first phase or whether that is it, we do not know, but of those 750, it is not going to save the network, neither is the Post Office Card Account.

Q168 Mr Oaten: You have not answered my question. How is it going to actually affect the individual subpostmasters and their profitability? Not necessarily just because of that scheme, but generally if you had all the government schemes that you have been talking about coming into the post offices, do you think that will have a big impact on the subpostmasters? How are they going to cope with that?

Mr Jones: The answer to the question is it depends on the contract price. Anybody can get work, the trick is to get profitable work that is going to feed through to generate income from Post Office Limited and subpostmasters, and it would depend on what work it is, what the contract price is, and what percentage of that contract price actually flows down into the network, so there is no answer to your question, but we do not want subsidy. Subpostmasters do not want to be seen as subsidy junkies.

Q169 Mr Oaten: But it would have to be subsidised. To put all the technology in to do the things in your wish list, you would have to have some level of subsidy.

Mr Jones: We need capital investment, that is different from an ongoing subsidy. If we get the capital investment that is going to --

Q170 Mr Oaten: Who is that coming from, that capital investment?

Mr Jones: There are lots of different ways to do it. Traditionally, what has happened is the equipment is supplied by Post Office Limited, but actually, if there was enough margin in the product, and subpostmasters can see a return for their investment, they are not stupid people, they would be quite prepared in some cases to make that capital investment themselves, provided there was a long-term contract and they can actually see a return on that investment.

Q171 Chairman: We are going to have one last big area of questioning, but just a couple of follow-ups before we do that, Lindsay has some on banks, but on this question of investment, some subpostoffices look very tired these days, they obviously need a refresh; that investment comes typically from the subpostmaster or from POL, or both?

Mr Jones: It comes typically from the subpostmaster. There have been a couple of schemes in recent years where under the network change programme, a subpostmaster, if he was receiving work from a neighbouring office that closed, he could apply for a grant to put in extra counter positions or create disabled access or something like that, but the actual physical responsibility for the environment in which the business is conducted falls on the subpostmaster.

Q172 Chairman: And the lack of profitability and the uncertainty combine to make that investment unattractive to make, as a rational business proposition?

Mr Jones: Absolutely.

Q173 Chairman: Just one final question before I hand over to Lindsay. You make great play in your document about the need to return one particular service to POL, which is the BBC television licence. The truth is, is it not, that POL was ripping off the BBC for a long time, charging an extortionate amount of money for the service. A bit of competition came in, and PayPoint has a different model, I agree, in terms of the remuneration package for subpostmasters, but also a leaner, meaner headquarter staff, a very efficient organisation, good technology. It could offer the service much more cheaply and therefore is not the BBC a beneficiary of that cheaper revenue collection service? I mean, has not competition brought benefits and do you really want to isolate Post Office Limited and subpostoffices from competition?

Mr Thomson: We do not want to isolate anyone from competition, but on the BBC in particular, it was not just about price, Peter. The top executives of the BBC will tell you that. Because the Post Office was such a trusted brand, we were a roadblock to people paying their BBC licence by direct debit, and from all the facts and figures I have had, there has been a significant upsurge in direct debit for paying the BBC, there is something like 2 million less people now paying it on the High Street. I suppose we want people to have the choice, but the Post Office did sharpen their pencil, maybe not to the extent it should have, they probably would sharpen their pencil more now, but there was another agenda by the BBC, and that was to take people to the cheaper method, which was direct debit paying your BBC TV licence. In fairness, if PayPoint had won the Post Office Card Account contract, that would have happened again.

Q174 Chairman: But you do recognise, do you not, that Post Office Limited has not been a good negotiator over the years with the service providers it wants to get contracts from? It has tended to say, "Here is your price, take it or leave it", knowing it would get it, so there is no competition.

Mr Thomson: I think it is fair to say for a long time in the bill payment market, apart from paying through your bank account, we were the only game in town and maybe people got a bit blasé regarding that and should have sharpened their pencil a long time ago. I have no doubt that if Alan Cook had taken over two or three months before he did, the BBC contract may have been retained, because he recognises that you have to give service and give a good price at the same time.

Chairman: Thank you very much for that. Banking, Lindsay.

Q175 Mr Hoyle: Can I take you on to the banks and the financial services? Just before I do, you just made one quick point, and you said it is about subpostmasters' and mistresses' loyalty to the company. Do you feel that the same loyalty comes back?

Mr Thomson: Well, sometimes we feel neglected, absolutely, and we have always made the point that it is better to try and win people over by carrot rather than stick, and sometimes I find the business forgets that. You are better to take people with you. But do subpostmasters feel unloved and unwanted? They probably do. They are happier that we have won the Post Office Card Account, and when people listen to Lord Mandelson and Pat McFadden, they actually feel that for the first time for a long time we could have a future. But again, our job as a National Federation of Subpostmasters is to make sure that these warm comforting words turn into concrete actions on the ground.

Q176 Mr Hoyle: My word, you are the only person that took comfort out of Pat McFadden. It took a lot of arm twisting to get him to change his mind, I will tell you, but there we are, at least he did. Just moving on to banking, why have you not joined the Postbank coalition?

Mr Thomson: The Federation's policy for the last two years is to create a Postbank, so much so that when Alistair Darling was at the DTI, before he went to the Treasury, at specific request from the Federation he had a team of civil servants looking at the possibility of bringing NS&I back into Post Office Limited. It was the Post Office Savings Bank from 1861 until 1969, so it was part of the Post Office for 108 years. Now I believe the phraseology was it was too big an ask. That was before the credit crunch. We feel that a Postbank, a new creation of a bank without any toxic assets, taking banking back into the communities, would be a tremendous thing for UK plc. The Federation's policy on this is quite clear, we do not want to just unblock the pipeline, we want to extend the pipeline into 12,000 communities. The reason that we are not behind the campaign, we support it and we are pushing it through our booklet, is we do not think it is a silver bullet on its own. A Postbank is a major pillar of the future of the Post Office, but it is not a silver bullet on its own. It has a role to play, and the Irish Republic have set up a Postbank last year, and myself and Mervyn have been across twice, meeting the chief executive, Martin Sweeney, so we do support the creation of a Postbank. Once we get through this recession, I think it is important that the British public rediscover a balancing act between consumption and savings, because the country and individuals have been living way beyond their means for a long time, and once we come out of this recession, it is important that people start saving again. We believe that postmasters could be the secret weapon to get the communities to start saving again for the future.

Q177 Mr Hoyle: I totally agree with you, I am with you all the way, because in fairness, the Post Office Card Account is short-term. We all know that when people retire, they do not want to turn up at the post office in general to collect their money, so it is declining, it is ramping down rather than ramping up, so the bank would actually ramp up the services of post offices, and give real competition. My view is simple: you should have a bank, you should have competition to the High Street, there are no better people to run it than yourselves. Now my view would be, and I notice you mention it, or it has been mentioned, why do you not use, say, Northern Rock to create a new Postbank because the one thing that Royal Mail has not got is a banking licence and therefore in order to run a bank, you have to have a banking licence, and there is a short-term measure; the government now owns Northern Rock, they need new customers, no toxic debts, could this be the win/win that you need?

Mr Thomson: It certainly could be. I think we could get the banking licence from Northern Rock. However, I have to say, my preferred option for the post office to become a bank, to bring stability to 12,000 post offices, to take banking into local communities up and down the UK, is for NS&I to be made part of Post Office Limited with a full new range of products that takes banking back into communities and that gives you stability and it helps the government as well. That would be the preferred option that I would have. However, I know it is probably the most difficult option, but if a government was really forward thinking, really concerned about underpinning banking in local communities, really concerned about keeping together the fabric of these small towns and villages, then that would be a tremendous policy for the government to carry out.

Q178 Mr Hoyle: And of course because they have all the services they could put them in, all the infrastructure is there, so much cheaper and it is about doing something instantly rather than a long drag factor to try and re-invent the wheel that is already there. Do you see the Postbank services being made available in every post office, if it was to happen?

Mr Jones: That would be our preferred option. If we have a network of 12,000 offices, let us use them in every community in the country.

Q179 Mr Hoyle: Because what I do not want to see is a two tier post office system. What I would like to see is one tier where it is open to all and it is about bringing banking in -- if you take a constituency like mine, where I have rural and urban, it is about bringing the opportunities and choices there, so I am pleased we do say that. Just to play devil's advocate a little bit, why do you need the banking system, why can you not add to the functionality of the POCA, and why would not that be a system that you could build on, rather than having to bring the bank in?

Mr Thomson: What we need to do, Lindsay, is two things. First and foremost, we need to create a Postbank, but secondly, you are absolutely correct, the POCA contract is a short-term contract which will run out in five years' time, and if we create a Postbank, I would envisage that every person who is left on the POCA towards the end of the fifth year should be given a basic account in the British Postbank. That touches all the right bridges. It is quite funny at this moment in time, or not funny, I suppose it is the way things are happening, with the recession being so deep, that there is quite an uptake lately on people using the exception service, which was the old green giro, the figures are starting to increase. Also for the first time for a long time, there are actually more POCAs now being opened than are being closed, and what that tells you is that the recession is kicking in. In other words, if you have been made bankrupt or you have lost your house or if you have a lot of debt, you do not want your benefit going in a bank account that can be taken away, so it looks like the POCA is heading towards about 4 million a year again.

Q180 Mr Hoyle: That is interesting. But is it really a way forward to expect every subpostmaster to suddenly become a bank manager, offering the wide range of financial services? I believe they can do it but I would like to hear what you think on behalf of your members.

Mr Thomson: What would happen, I reckon the biggest offices would be the financial advisers, for example, like you have in the banks. The rest of the network should do every other transaction, so we believe that the 12,000 should do as many banking transactions as possible. But because the Post Office is a trusted brand, because we are used to looking after money, because people feel secure when they come in, we also have fortress positions, because of all these reasons, because we sign the Official Secrets Act, in the Republic of Ireland, rather than everyone having to go through training from the start, the staff were given what you call grandfather rights, so they had to get some training, but that training was far less rigorous because of their specialisation, postmasters specialise in handing out money. They have done it for years for government, we still have 20% of the benefit market, we are honest, we sign the Official Secrets Act, we do not talk about our customers, we have great integrity, and I do not think it would take much to build on that to become a Postbank.

Q181 Mr Hoyle: I agree and presumably if you are in a rural area and you wanted to see somebody, somebody could actually come into that post office, you could arrange an appointment for somebody from the centre, a constituency manager, whatever you want to call them. So it would be a way forward that we can deliver services, we can open up banking back into rural and urban areas where they have been neglected and where the banks have retreated from giving true competition, is that fair to say?

Mr Thomson: Absolutely.

Q182 Chairman: Just a couple of quick questions before we conclude. I was going to ask you about Essex and Devon and Wales, but actually you have made your views very clear in your written submissions so I think we can accept that you are not enamoured of the Essex model, their long-term plan of ownership, but in Wales though, I think we were all quite impressed by the money being paid to help subpostmasters diversify and retrain into new services they might provide, particularly food handling. That kind of approach does commit itself to, I imagine, assistance in retraining?

Mr Thomson: We think the Welsh government, the Welsh Assembly, have really stepped up to the plate both in terms of rates relief and grants for subpostmasters as well, and we feel that the devolved assemblies in Northern Ireland and Scotland should look at that model and certainly can do more. But one of the disappointing aspects of this closure programme is under network reinvention, there were grants to help subpostmasters do up their offices, recognising that they have not been paid the money to invest it themselves. I think what is disappointing this time round, Peter, is that the Post Office are going to put £40 million in upgrading 373 Crown offices, and as we speak, not a single brass farthing into the rest of the network. That is bitterly disappointing, and we have raised that on numerous occasions. It is unfair, and if we want to have the brighter, better post offices of the future, then there has to be cognisance taken of the fact that subpostmasters need help to create these better, brighter offices for the future.

Q183 Chairman: I do not think there is a Crown office left in Worcestershire, so they are lucky ones who do have one. The Post Office Essentials model, is it really commercially sustainable? This is going back to the old question about subpostmasters not getting enough money for their services.

Mr Thomson: There are 19 offices in the trial for Post Office Essentials, and the jury is still out. Does it make money for the Post Office? We do not know yet, that is what the trial is doing. Does it lose less money? Yes, it does. However, there is a very serious caveat. We think Post Office Essentials can help the Post Office restructure the network for the future, for a sustainable network. There is a danger that if you take that model into too many branches by opening new branches, that all you do is cannibalise the existing network, so Post Office Essentials has a place, but that place, I believe, has to be tightly controlled. I think what the government should be looking to make sure is that the Post Office Essentials model can never be any more than a certain percentage of the post office network, because if it proliferates too much, then all you do is undermine the offices that are there, so it has to be very carefully watched, but it may have a future.

Q184 Chairman: Finally, looking to our next witnesses in particular, I think we as a society, and politicians, tend to underplay the importance of the post office network to small business. We have had complaints from the small business community about some of the services not being provided appropriately in post offices, or not available at all, particularly banking services, for example small business bank accounts not available at the counter in post offices. That is leading our witnesses rather, but is there anything that you as sub-post offices would like to do more for local small businesses than you can do at present?

Mr Jones: As small businesses are growing up in rural areas they need access to services, and particularly a route to market, and the Post Office provides that at 12,000 outlets throughout the UK. I feel that business banking could be improved and the services on offer in terms of current account banking, cash withdrawals to pay wages, and that type of thing, could be improved. I feel that it is becoming more important that services are available locally to business. I am fairly familiar with the Highlands of Scotland where people are making lifestyle choices and running particularly IT business consultancies and things like that from home, and they need to be able to access services, so business banking definitely and probably improvements in priority mail services as well.

Mr Thomson: Just to add to that Peter, if in the future the Government were to award a contract for something and the Post Office were going to do it for 12 pence but PayPoint said they could do it for ten pence, if the consequence of that decision of going to the lower bid and not the most economically advantageous price was that hundreds of post offices closed, then small businesses would have enormous cost added to their daily routine where rather than take their parcels or their banking to a local post office they would have to travel miles and miles, so there has to be an holistic approach by government.

Q185 Chairman: One specific question and then we will have to close, I am afraid, because we are running out of time. The small business community does say that sometimes there are huge problems in Crown offices and franchised offices for small businesses in queuing and taking time out of their day, but they often say that even in sub-post offices the queues can be long and they want dedicated counters for business services. That is not going to be practical in many sub-post offices, is it?

Mr Jones: As a sub-postmaster I have got a choice. I can overstaff my office and have no queue and not make any money, or I can not staff my office and have a big long queue.

Q186 Chairman: Individuals quite like the queues because they can chat in them and talk to their neighbours.

Mr Jones: Certainly there are people who value being in a queue in rural areas, but it boils down to finding a balance, and that balance is very, very important because striking that balance is the difference between success and failure in running a post office. That is the way it is. At times if we get a customer, particularly now with eBay, coming in with five, ten or 20 packets to send, it can be quite time-consuming, so happily the Post Office are trialling a programme called Fast Drop at the moment, and it is a service for business to be able to walk up to a specific counter position, leave the mail there, and the sub-postmaster stamps the receipt and then does the paperwork afterwards.

Mr Thomson: In fairness to sub-postmasters as well, for every time a post office is busy, there are significant quiet times as well. People do not remember when they walked up to a counter but they remember when they waited ten or 15 minutes in a queue.

Q187 Chairman: And those quiet times are predictable broadly, are they not, over the pattern of a week or so?

Mr Thomson: They are.

Q188 Chairman: Tell local small businesses to come when they are quiet, that is the answer, is it not?

Mr Thomson: Many sub-postmasters do have shops and pubs coming with their banking money at quieter times when they can deal with it, so that is a practice on the ground already.

Chairman: We have lots more that we would like to ask you but we really are out of time. Thank you very much. If you think there is something you have not said that you would like to have said, and I do not think there is, I think it is all covered in here but if there is something. We have particularly asked for evidence on the combi-till issue which is an interesting way of extending opening hours. Thank you very much indeed, we are very grateful to you.

Memorandum submitted by Federation of Small Businesses

Examination of Witnesses

Witnesses: Mr Clive Davenport, Chairman for Trade and Industry, and Ms Ulrika Diallo, Policy Advisor for Trade and Industry, Federation of Small Businesses, gave evidence.

Q189 Chairman: Lady and gentleman, thank you very much indeed for being patient and waiting. We are running slightly late but I think you would understand we had important evidence to take there and some useful discussion, and I hope you found it interesting, too. We are very grateful to you for your written evidence. You come to us as partners in the Post Bank Coalition. Of course, I have worked closely with the Federation recently on rate relief and I am grateful for the support that I had from the Federation there as well. Can I ask you to quickly introduce who you are and I have one opening question before I hand over to Lindsay Hoyle.

Mr Davenport: My name is Clive Davenport and I am the Policy Chairman for Trade and Industry for the Federation of Small Businesses.

Ms Diallo: I am Ulrika Diallo and I work as a policy advisor for the trade and industry brief.

Q190 Chairman: We have to say we like the trade and industry phraseology on this Committee! Just before we move to more specific questions, can I ask you to explain why the Federation takes an interest in the future of sub-post offices?

Mr Davenport: It is essential to small businesses and it is also essential that small businesses do not see any more post office closures. We are having a hard enough time as it stands. The last round of closures has created a substantial problem for small businesses. To give you an idea, on average 19% of small businesses use the post office every day. If you project that up, that is 817,000 businesses every day which use post offices. That is how crucial small business is to the Post Office and the Post Office is to small business. It is a two-way street and that is why we have been involved in the Coalition and every other means at our hands to protect post offices. One of the things we do find is that there is plenty of debate about electronic communication, but our recent survey has shown that that is not the case. 88% of the recipients of the survey use post offices to do their accounts, to send their invoices, and they do it manually, they do not do electronic transfer, and only 11% use the electronic metered mail, so it flies slightly in the face of what is perceived with regard to the general public and the Government.

Chairman: I think that will do by way of introduction. I am very grateful for that. If I ask anything I am likely to tread on my colleagues' toes so I will go straight to my colleagues. Lindsay?

Q191 Mr Hoyle: It is an interesting point you make and I am sure Lord Mandelson and Pat McFadden will take that on board because all they keep saying is that businesses are just using metered mail and you are just proving the point. I also know in the postal survey you did that 89% of respondents use the Post Office to purchase stamps and send letters and 77% of respondents use the Post Office to send parcels. That is your survey and that just tells us how important the Post Office is. I am really pleased with that.

Mr Davenport: That survey was six weeks ago, something like that.

Q192 Mr Hoyle: So it is bang up-to-date. In fact, it is probably more bang up-to-date than the evidence we have heard from ministers, so that is good and I hope they are listening and taking that on board. Can I move you on to some of the questions. Is there anything inherent in what the Post Office does that justifies its monopoly?

Mr Davenport: Guarantees their monopoly. As a small businessman, guaranteeing monopolies makes me uncomfortable, but what we have got to do is not look at just the service they give, it is the community that they generate, of which we are a part. We see the breakdown of that community. When post offices were closed I think between 14% and 16%, around that area, of local businesses were damaged, so they are an essential cornerstone of community life, and it is essential that they remain there, not only for our selfish reasons of wanting to have the service that we require but because the communities that they create give strength and therefore security as far as our own businesses are concerned around them.

Q193 Mr Hoyle: So it would be fair to say that what you are saying is that it is a vital service they are providing that holds the community together. It is the catalyst that keeps that community alive and of course it keeps small businesses alive as well. Would that be fair to say?

Mr Davenport: Yes, I am just uncomfortable with the word monopoly.

Q194 Mr Hoyle: That is right because of the way that we do it, but what we are saying is that it is a vital service and it is very hard to measure just how good a service it is?

Mr Davenport: Yes, as a community service, if you look at it as a community, you have to say to yourself what other community services are there when we look at the £150 million that has been mentioned. We could say that policemen are a community service. Are they a liability? Are nurses a liability? The Government has got to decide and society has got to decide where it places the Post Office within that whole structure of the services that are provided to its communities and to its people.

Q195 Mr Hoyle: Absolutely right and the monopoly they have been given is the USO which guarantees that they deliver everywhere. Nobody else in competition wants the USO. They could all take it up but not one of them wants to step forward. It just proves that we really do have only one that can provide the service. SMEs use the Post Office largely, as was said, for mail services provided by the Royal Mail Group. Are there any companies which could offer mail services which could compete with Royal Mail - and this is the key part of it - and be more convenient than Royal Mail?

Mr Davenport: I doubt it. The problem we have with all small businesses is that most large conglomerates like TNT and the like are not comfortable with volumes that small, they are not interested, and so you cannot get a service from them even if you wanted it. That is a common comment that is made by most of the recipients of our surveys, not just this one, other ones as well.

Q196 Mr Hoyle: So it would be fair to say that it is profit before service where this is service before profit, in a sense?

Mr Davenport: Indeed, and what we are looking at is the Post Office creates an even, reliable consistent service and that is what small businesses are desperate for. You have got to remember that something like 89% in the last survey work from home. It is quite substantial amounts.

Q197 Mr Hoyle: We are going into the area that I just want to touch on and push a little bit more towards it. How much does the location of a post office matter and does business need them close by and, if so, why does it need them?

Mr Davenport: It depends which type of business you are in. If it is small shopkeeping for financial services and so on, then they need them fairly local because they need to not leave funds in their premises at night and they tend to use the post office as a secure system to control that. A lot of other businesses (and this is where we get this how many times you visit the post office, on average twice a week) that are away from the post office area come in and do their mailing en bloc, both invoicing and sending out their goods. They do not do it on a daily or half-daily basis. They do it once a week or twice a week or more.

Ms Diallo: If I could just add to that. It is about saving time as well because for a small business who often are sole traders, the vast majority of members that we represent have fewer than five employees or they are sole traders. To take that amount of time out, if you are based at home for example, and you can walk to your post office, that is a fairly swift operation, whereas if you have to get in your car, go to the nearest town and find a post office there, find parking, go in, queue up, because one of the things that we have seen with the last round of closures is that queuing times have increased considerably, it is a matter of saving essential time really for a small business.

Q198 Mr Hoyle: And it is helping ensure that rural communities survive and it also helps save the climate as well, because we do not have to do all the extra miles and we do not have to all go to a town, and it is about the protection of rural areas. Is that fair?

Ms Diallo: That is right.

Q199 Chairman: Is it also important for your members, and I do not want the answer that sounds convenient, I want the truth, is it also useful for your members who are living in the internet age, many of whom are offering mail order business, to be able to go to the post office daily rather than twice a week to post packages to make sure their customers have their orders fulfilled in good time? Is that also an issue for small businesses?

Mr Davenport: It certainly is.

Ms Diallo: As Clive mentioned initially, 90% of our members visit the post office every day, probably because they want to respond to customers' demands quickly, they want to send a parcel straight away. 47% say that they visit the post office a couple of times per week, so it is certainly a very frequent occurrence in the life of a small business to go to the post office.

Q200 Mr Hoyle: Just to move you on, obviously we have got the Postal Services Bill that is sat in the Lords at the moment. It is a strange place to starts it, especially as I think the Commons is still the democratic House, but allowing for its start in the Lords (and I think it is an absolutely ridiculous Bill) and allowing for my own prejudices against the Bill, do you see that there is a benefit in separating Royal Mail and Post Office Ltd and how important is it that we look after small businesses, and what effect do you think separating the Post Office Ltd mail business is going to have?

Mr Davenport: It is a difficult one for small businesses because the decision to sell off part of the postal service is a decision of the Government and there is not a lot that we can do about it.

Q201 Mr Hoyle: They have not quite done it yet but if it rolls through?

Mr Davenport: There is nothing we can really do about it. All we are looking for is a consistent, efficient service. If we have to hive off part of it to do that then so be it. As was said by the previous people, I think there are many other ways of doing it other than selling it off. One of the things we have to consider from a more global point of view is that, as the Chairman said, email is becoming more and more prevalent and we are getting more and more of our bills being able to be done on-line and so therefore large postal deliveries for statements and so on are going to be reduced, and TNT are going to see their part of the business starting to contract because of that. It may be in their own interests to move into that market.

Q202 Mr Hoyle: And taking some of the competition away that you have got a stake in? We always talk about competition but in fact it does not do anything for competition.

Mr Davenport: Exactly.

Q203 Mr Hoyle: Just finally on that, obviously you have members that you represent, would you advise them to sell a business at a time like this?

Mr Davenport: Not at all.

Mr Hoyle: So why on earth do we think that the Government should be trying to sell off something that we own? I will leave it at that, Chairman, thank you for that.

Chairman: That is another inquiry we have completed actually. Mark Oaten and Mike Clapham will ask you some questions about small businesses.

Q204 Mr Oaten: In your submission, you said that you felt there was a need to streamline the network and I want to try and tease out of you in a bit more detail what you had in mind there. Do you want to see fewer post offices or fewer services?

Mr Davenport: No, streamline and make it more efficient in the way that it operates. We have got to remember that this whole ethos of changing the postal regime was supposed to give us a more efficient postal service and it was supposed to make it cheaper to use. Small businesses have not found that at all. The big winners on this contract have been the banks on their invoicing and statements. The big mailers are the ones that have made substantial savings because TNT collect 10,000 pieces of mail in one hit. Small businesses have not had any of those advantages.

Q205 Mr Oaten: I am still not clear what you mean by streamlining. You just want a cheaper service?

Mr Davenport: No, we want a more efficient and flexible service.

Q206 Mr Oaten: Give me some examples of what that would include?

Mr Davenport: The American system is just one example of collection and delivery at one point. You have got a Royal Mail van which goes out and delivers a parcel in rural areas and then goes back empty.

Ms Diallo: We have to be very clear that the FSB does not want to see any more post office closures at all. The continuation of the network as it is at the moment is absolutely essential for the running of small business. However, as was mentioned in the previous session, the fact that different post offices, for reasons of size, et cetera, offer different services can sometimes be a bit confusing. As you were asking for previously, a list of essential services that are offered in every post office might be one way forward just to bring some clarity to what is actually offered. In an ideal world, for every post office to offer every service is what we would want, even if we may not be able to achieve that.

Mr Davenport: To give you an example of my local post office, I can get my passport photograph done in my local post office, but I cannot get a passport; it is ludicrous.

Q207 Mr Oaten: If you were to score it out of ten would you say that the Post Office is delivering a good service for small businesses in this country? What would your mark be out of ten?

Mr Davenport: Ten is good you mean?

Q208 Mr Oaten: Normally ten is good.

Mr Davenport: Five or six, middle of the range.

Ms Diallo: The waiting times and the consequences of the last closure programme is what our members are most upset about from this survey that we have just carried out was the access to the post office, because with the closure rounds the nearest one might have closed and they have to travel a bit further to get to the next nearest one. Then of course there are a lot of suggestions in the survey as to what the Post Office might offer in the future so we feel that there is room for improvement certainly.

Q209 Mr Oaten: So about five or six out of ten as things currently stand, but you would like to see perhaps some specific services for business put in place, picking up on some of the ideas that have been talked about?

Mr Davenport: I think what was said in the previous session says it all really. The sub-postmaster was saying, "I could employ people and we would not have queues," or, "We don't want to do this because it is not very efficient to do it and I do not make very much money out of it." What we are saying is what we want is a consistent service throughout the organisation so that we can go into post offices and get any service that we want. Every post office, in our view, should have every service. If that means that as a society we have to provide funding for that, then so be it. As I said earlier, you have got to relate this to policemen, nurses, everyone else. It is a community service and we are a part of the community and we feel that we should be listened to a little more than we are.

Q210 Mr Oaten: A final question before I go to Mike, is there not a danger, though, that if you were to get this kind of service agreement with the Post Office for the moment in two, three or four years' time the figure of small businesses that are starting to do things on-line is going to increase from 11% to 50% or 60%, so the long-term viability of post offices improving their service and investing for you is not really worth it because small businesses are going to change their patterns and they are going to be doing much more electronically in two or three years' time than they currently are?

Mr Davenport: We are not capable yet of electronically moving a parcel so we still have to go through that system. I agree with you perfectly, in my view and certainly some of our members' views, the idea of drastically improving the efficiency of the postal service (when I say that I mean the envelope) is a little misguided because that service is going to decline, so why invest in it now, it is too late to do that. What we should be doing is investing in parcel services so that we get a much more efficient service. We are in the eBay age and what we need is fast-moving services in both directions. I believe that the Post Office and Royal Mail have missed a trick in not responding more quickly than they did.

Ms Diallo: I would like to add to that, please. You are right in saying that, yes, some small businesses will probably go for the electronic options that are out there, but an awful lot of them will not. In 2006 we carried out a similar survey to the one that we just carried out and then 88% of respondents said that they sent post every day so that pattern clearly has not changed. It is only three years but a lot will have happened, maybe, which indicates that there is a big section of the small business community that will carry on using the post office.

Q211 Mr Oaten: The amounts that they send may have changed in three years. You can send one letter and still tick that box whereas three years ago you may have been sending 100. There is an issue there in terms of the capacity, the amount.

Ms Diallo: That is true, I take that point, but also we want to put on record the usage of the post office is something that is very, very important to small business.

Q212 Mr Clapham: What you are saying, Mr Davenport, is that the post office network is essential to small business and you cannot really at this point in time envisage another business coming in to provide the kind of service that the Post Office does for small business?

Mr Davenport: No, the cost of the infrastructure construction would be enormous and it would be uneconomic.

Q213 Mr Clapham: A little earlier in answering one of Mark's questions you said that POL or the Post Office network had missed a trick. Given that a great number of your members actually use the postal services both daily and weekly, do you feel that the queuing that has occurred as a result of the trimming of the post office network is likely to result in a less efficient service and therefore to perhaps motivate some of your members to look elsewhere?

Mr Davenport: We have not seen that in the survey. We asked that specific question in fact, did we not, I cannot remember what the figures were, but very few of them were likely to look in other areas, quite surprisingly so, because I would have thought that they would have done that. I think it is faith in a service and that is the important thing. There are so few things nowadays that we can have faith in and that faith remains that the one that is working let us try and keep it.

Q214 Mr Clapham: So really underpinning that faith is a feeling of trust in the network?

Mr Davenport: Yes. Can I just put a little rider on there. One of the things that we have found in the last survey is that more people are going to the post office to register mail because of mail being lost. That is an interesting point. I do not know why that is but it is happening and therefore more of our members are actually going into post offices to record mail, which is slightly concerning.

Q215 Mr Clapham: But I suppose given that in a rural community many of the small businesses are run from home, there is a necessity to ensure that any communication that is sent from the post office is registered, particularly if you are running something that is a part-essential service?

Mr Davenport: Yes, it is quite possible that that could be the reason. We just asked the question and this was the result we had. We have not examined the reasons why there is that increase in registered mail compared to what it was three years ago.

Q216 Mr Clapham: Given the convenience of the postal network, particularly in rural areas, for small businesses, would your members possibly consider paying a premium to ensure that the service remained locally?

Mr Davenport: We have percentages on that. I think it was almost 50% who said that the price that is being paid at the moment is as much as they could pay and the other 40 something per cent said that they were prepared to see a 5% increase. Have you got the figures exactly? As with all surveys, you have got to find the piece of information.

Ms Diallo: 48% said they were at the limit already and they would not really want an increase at all in charges. We asked people the question specifically, "Would you pay more for the postal service in order to keep the post office from closing?" and we asked them to tick every option and then a 5% to 10% increase, 45% of respondents ticked, so there is room there for a small increase in charges.

Q217 Mr Clapham: There is a little bit of headroom there?

Ms Diallo: Yes.

Q218 Mr Clapham: Which is quite interesting and that seems to, as you say, line up very much with what you were saying about trust on the one hand and of course the convenience of the post office being based locally on the other.

Mr Davenport: There is the frustration, pricing it in proportion is a slower process when you take your parcel or whatever to the post office and at virtually the same time that PIP was coming in, there were post office closures, so you got a double whammy, you got longer time in processing mail and then at the same time you are closing post offices, so you are bound to have longer queues in some sub-post offices, but those queues, as can always be said, it is always the frustrating time that you remember. You do not remember the ten times you went in and walked straight to the front of the queue, but those are the times that are remembered and those are the times that our members have made quite vociferous comments about.

Chairman: I would like to say how much we appreciate the survey you have done. It is a very, very useful tool and gives hard evidence which this Committee greatly values. We are very grateful to you for that work, thank you very much indeed for that. Adrian?

Q219 Mr Bailey: I want to explore the issue of banking and your members' needs. What minimum banking service do you think the Post Office should provide for them?

Mr Davenport: It needs to provide a full banking service really. If we are going to have a then we should have a Post Bank and not a half-hearted Post Bank.

Q220 Mr Bailey: That is an interesting response. Sorry, did you wish to add to that?

Ms Diallo: Yes, just really to emphasise that. It is not a lesser version of a bank that we are asking for with the Post Bank proposal; it is a fully-fledged retail bank that would indeed offer the business account side of things and also give access to every other retail bank, because one of the things that came through in the survey is a lot of small businesses already use the post office for some of their banking needs, but they felt that if they had full access then that will be a great help to them. Particularly in many rural communities of course the bank may be shut but there may still be a post office, so if full retail banking services could be provided that would be a great help.

Q221 Mr Bailey: I am slightly surprised by the conviction of your response given the fact that only 38% of your respondents thought that a Post Bank, which as far as I can see is the only idea on the table for a full banking service, should be provided. Why is there this discrepancy between the level of your conviction on this and the support for it amongst your members?

Mr Davenport: As we said earlier, this survey was done six weeks ago and in the meantime we have had our conference so there has been a lot of communication with our members. We have had some quite vociferous comments about it so what we are doing really is reflecting the very latest information.

Q222 Mr Bailey: So in effect that 38% would reflect to a certain extent a lack of comprehension about what was being proposed?

Mr Davenport: I think so, yes. I think from the time of the survey to the time of the conference people have started to get their head much more around it, and of course they are having problems as far as the banks are concerned anyway and so they are looking for alternatives. That is why we had the stronger comments that we had at conference.

Ms Diallo: Can I just make a bit of a clarifying point there. The 38% refers to members who say, "Yes, it is a great idea and, yes, we would bank with a Post Bank," suggesting that they would leave the bank they are currently with and go and bank with Post Bank. We feel that 38% is quite a significant number because we did not expect our members to so willingness say yes, they would bank with a Post Bank, as it is just a proposal on the table. A lot of our other respondents, which we have not made clear in our response here, said, "Yes, it is a good idea if it is saves the post office network but I am not sure I would go and bank with it." We are happy to provide those figures for the Committee later.

Q223 Mr Bailey: Just exploring this slightly because at moment I think it is fair to say that the Post Bank is a vision rather than a model, would your members be keen to participate in consultation about the services and the development of a model, if you like?

Ms Diallo: I think the response suggests that, yes.

Q224 Mr Bailey: Given the importance of banking facilities to SMEs, and of course the very specific needs of SMEs, it would seem that there is a natural need for the two to get together.

Ms Diallo: Absolutely, and particularly given the fact that small business at the moment find access to credit extremely difficult with the banking system as it is. I think an alternative that promises to be different and to offer a different range of services is a welcome one.

Q225 Mr Bailey: I was going to ask you about the existing banking facilities through the post office network and whether those could be expanded to meet the needs of your members. From what you said, it would appear that implicitly you are saying no, or that they would not meet the range of needs that your members would appreciate. Is that a fair comment?

Mr Davenport: Yes.

Ms Diallo: Yes.

Q226 Mr Bailey: The Post Bank proposal also includes ideas about bonds, credit unions and community support. Do you think your members would get interested and involved in this?

Mr Davenport: I think they would need to know exactly what the detail is. It needs to be done quickly if it is going to be done at all but it needs to be evolved quickly and consultation, not just in Westminster but nationwide, would be the best way to do it.

Q227 Chairman: Before I hand on to Lembit for the last few questions, can I test you a bit on this Post Bank idea. I think there is an emerging consensus that Post Office Ltd needs to increase the financial services that it offers and that it is a good argument in its own right and it would help the post office network. The Post Bank proposal, to which you were partners, was launched a couple of weeks ago in the House of Commons and is a very high-level document with very little detail about what might be offered. The only detail that surprises me that the Federation put its name to is the suggestion that it would not be a profit-making bank at all. "We have a choice - free banking or charges that are lower than those of commercial banks." "It must signify a significant departure from profit-driven, speculative banking practices ..." First of all, I do not see how we would ever get through Europe and the state aid procedures a state-run, subsidised bank that did not make a profit, but also is that really a credible model for a bank?

Mr Davenport: We have got to look at whether we are looking at a community or the individual as far as small businesses are concerned. It is a difficult one to answer, but what we are saying is that what small businesses require is consistency, which they are not getting at the moment, and they need to see that whatever borrowings that they do have remain consistent throughout the service of the loan. Those are the sorts of things that are causing businesses more trouble than anything else at the moment, being objective about the way their overdraft facilities and criteria are run. Two months ago you could do this, this and this and now you cannot do this, this and this, it has changed, because head office have said something different, and so what was a viable company is no longer a viable company because they have got no cash flow. As was said earlier by Brian, cash flow and profitability are two completely different things and cash flow can quite easily bring a company down. That is what we are looking for; we are looking for consistency.

Q228 Chairman: A lot of that can be addressed by getting existing banks and government funding systems to deliver what they are already promising. There is a whiff of idealism - and I love idealism, I think it is fantastic, and we do not get enough of it in our society these days - in this Post Bank proposal, is there not? It is a very fluffy, cuddly bank and in practice we are not going to see this model implemented as suggested. This is a negotiating position, is it not, for the Coalition?

Mr Davenport: Effectively, yes.

Ms Diallo: Just to add to that, it is a coalition of organisations that traditionally would not be seen to be co-operating possibly around these ideas. The angle that the Federation of Small Businesses is coming at this from is essentially to save the post office network because we feel with a Post Bank that would fundamentally strengthen the post office network and bring in much needed revenue, so that is really the main aspect for us. Then we did the survey and 38% of our members said it is a great idea, we would bank with the Post Bank, so that has made us re-think. You are very right in saying that this is not a sorted-out deal of course, and with the Post Bank Coalition at the moment we are in the process of taking advice from financial experts, et cetera, to see how this could be funded and how this bank could be put in place. It is not going to happen overnight, we are very realistic about that, but we think it is a good argument to bring to the table.

Q229 Chairman: There is a lot of attractive stuff here, localism, local fund-raising, the involvement of the credit unions, some very attractive ideas wrapped up in it, but a tantalising lack of detail.

Ms Diallo: We take that on board.

Chairman: Thank very much. Lembit Öpik?

Q230 Lembit Öpik: I want to talk about the details potentially contained in your Local Small Business Hub. Who do you think should pay for those services?

Mr Davenport: I think initially the Government needs to start it but, again, it is the way it is structured. If it is structured correctly then it will function properly and once the funding is sorted then it should stand on its own two feet in a fairly short space of time and it should be structured that way. There is no point in doing business hubs on a non-profit making basis. There is no logic in that.

Q231 Lembit Öpik: You are saying basically you would want the Government to pump-prime it and that it would be presumably profitable for the Post Office? Do you see the Post Office making money out of that?

Mr Davenport: I do not think so, no, not a great deal. What we do not want is excessive profits from any of these proposals at the moment because business just cannot afford it.

Q232 Lembit Öpik: You would say that, would you not?

Mr Davenport: Yes I would.

Q233 Lembit Öpik: Because they will say that there is an opportunity cost for us doing that extra work.

Mr Davenport: But 100% of nothing is still nothing if you overcharge and people do not use it.

Q234 Lembit Öpik: I suppose that is true. You would not have an objection though that once it is set up there would be some sort of revenue return to the Post Office?

Mr Davenport: Most businesses realise that everybody has to have a profit to function. It is just the level of that profit, and transparency would be a nice one as well.

Q235 Lembit Öpik: We tend to agree with that one but that is for another time. Community policing was one of the things that you said could be connected with a post office. Who pays for that extra thing, once again government?

Mr Davenport: Community policing is already functioning. The idea was that post offices are traditionally in certain areas, and what we are looking at is should those areas be where they are now or could the post office be in different areas, could the post office not provide, as was said earlier, different services, council services and things like that, instead of having to go all the way into the local city centre or whatever to get services. Even in Cardiff where I live if I wanted a council service and I had to sign something I would have to go ten miles to do it.

Q236 Lembit Öpik: We have been talking about the prospect of having a Government Office concept for post offices so that you can access all government services. Is that the kind of thing?

Mr Davenport: That is the sort of thing, yes, because that means from a business point of view whatever facilities they require, whether it be government facilities or whatever, they can go into that one central point. It could be said that there is lots of funding, BERR do lots of business funding, so why could that not go through that sort of a system.

Ms Diallo: It is also a matter of increasing the footfall into the post offices because, as was discussed in the previous session, there is often a small shop attached to it and the more people you can bring into the post office to use the various services that potentially could be offered there, the better that would be for all basically, so that is also the idea behind it.

Mr Davenport: We did see footfall changes when post offices closed. We had some verbal comments about the percentage of footfalls, but I would not like to say them because they vary so widely and I think some were perceptions rather than actual fact. However, it is quite substantial. You can have one key business in the case of a post office close, or it could be a different shop, and you can have a 30% reduction in footfall. To give an example, in one of the arcades in Cardiff one shop closed and the arcade dropped 30%. Because it is an arcade and it is a tube, it is easy to measure the footfall and one shop and a 30% reduction is substantial.

Q237 Lembit Öpik : By contrast, have you got any even circumstantial data about how much you think business could improve if you had the kind of services that you describe in your submission, perhaps because it has been done in some part of the UK and we can make a comparator?

Ms Diallo: No, we have not.

Lembit Öpik: That leads me to two other questions. One is - and you probably cannot answer this straightaway - do you have a picture of what minimum services you think should be provided in a post office, a very clear, specific list of things? If so, we would invite you to write to us.

Q238 Chairman: Not things that you could add on to make it viable. What are the absolute minimum that you as businesses need in a post office, not desirable extras which the Committee may sympathise with you about, but core services that are crucial to business?

Mr Davenport: We can certainly get that back to you, no problem.

Q239 Lembit Öpik: I think it is better to do that in writing. It is the core proposition, not the add-ons that you have got in this section but the core proposition.

Mr Davenport: You do not want the fluffies.

Lembit Öpik: We like the fluffies too but what is the very minimum beneath which ---

Mr Hoyle: Some more than others!

Q240 Lembit Öpik: You do your job, I will do mine. Only joking! Obviously there is the other list of things which you think would be nice to have, but it is the things beneath which it just would not be worth a business working with. Sorry, Lindsay, I did not mean to sound so rude, I do apologise for that. I have one more question and it is this: some of the things in your list of proposed business activities, it seems to me, could end up being internalised because of IT developments in firms. The sort of thing I have in mind is the small business hub things that could end up simply being things you could do through a desktop in the end. Have you any consideration about the extent to which technology could undermine the long-term viability of the sort of business activity that you described?

Mr Davenport: The Post Office did do a survey and, to be frank, I cannot remember whether it was the Post Office itself or whether it was Royal Mail that did it, but it was about putting internet connections into post offices. Once you have got that internet connection in every post office in the full sense of a broadband connection in the post office, it means that the post office from a touch screen scenario could do an enormous amount of things and would encourage people to go to it because they do not have to pay for it because it is a screen and they bang on whatever service they want, and it gives them an answer, it gives them a guide, and so they go to the post office, they go to the area, it increases business in the area, it increases business in the post office because generally, "While I am here, I will do this or that or the other." Yet that got so far along the line and then it was quietly shelved. I do not know why that was but it seemed to me that that would have been an ideal opportunity to have streamlined the post office and made it more 21st century and given it greater access to its community. It would touch all the buttons but it did not happen.

Lembit Öpik: If I conclude with this request, and I am ashamed to do it after my outburst at Lindsay, probably about the fluffies, would it be possible when you write to us to make a list of things you think would never be internalised to small businesses, things which you just think however good technology you would still rather be able to go to, to use your phrase, the business hub, which would be separate to the very minimum requirement of things that you think might be able to do that.

Q241 Chairman: I am anxious because I do want to put some emphasis in our final report on the role of the Post Office in supporting businesses as well as vulnerable individuals.

Mr Davenport: Do you have a timescale for this, Peter?

Chairman: We will discuss it afterwards with the Clerks, but we are not in too much of a rush, do not worry. Unless my colleagues have any supplementaries they wish to ask ---

Mr Hoyle: It has been absolutely excellent.

Chairman: We are most grateful to you, thank you very much indeed for your evidence.