GD 2016/0008

GOVERNANCE STRUCTURE FOR THE ISLE OF MAN POST OFFICE

An Independent Report for the Council of Ministers

ELMAR TOIME

E Toime Consulting Limited

January 2016 CONTENTS 1 Terms of Reference 3 1.1 About the author 3 1.2 Isle of Man Meetings 4 1.3 Guernsey Meetings 4 1.4 Jersey Meetings 4 2 Executive Summary 5 3 Recommendations 8 4 Background and Context 9 5 Purpose of the Post 11 5.1 What is the Post for? 11 5.2 Public Policy Objectives for the Post 12 5.2.1 Government as owner 14 5.2.2 Government setting social policy 15 5.2.3 Implications for postal policy 15 5.2.4 Policy for state-owned enterprises 17 5.3 Expectations for a National Postal Operator 17 6 Isle of Man Post Office 18 6.1 The postal environment for the Isle of Man 18 6.2 The Case for Urgency 20 6.3 Isle of Man Government Policy for the Post 20 6.3.1 Small Government 21 6.3.2 Competition Impact and Economic Growth 21 6.3.3 Community Obligations 24 6.3.3.1 Post office network 24 6.3.3.2 Delivery obligations 25 6.3.3.3 Pricing 25 6.3.3.4 Employment Policy 26 6.3.4 Preferred Supplier to Government 28 7 Fit for Purpose 29 8 Case Studies 31 8.1 Jersey Error! Bookmark not defined. 8.2 Guernsey Error! Bookmark not defined. 9 Conclusions 32 9.1 International Experience 32 9.2 Nature of the Postal Business 33 9.3 Options for Change 34 9.3.1 Keep Statutory Board Status 34 9.3.2 Create a State-Owned Company 35 9.4 Risks of Corporatisation 37 10 Governance Framework 40 10.1 Tynwald and Council 40 10.1.1 Purpose of the Post 40 10.1.2 Shareholder Structure 41 10.1.3 Shareholder Supervision 42 10.2 Post Office and Board Structure 42 11 Transition 44 Confidential 2 | P a g e 1 TERMS OF REFERENCE

The Terms of Reference from the Cabinet Office are:

The Isle of Man Post Office is a Statutory Board of Tynwald and is a commercial trading entity. In addition to having a universal service obligation to fulfil, it is required to return an annual dividend to the Treasury. Isle of Man Post Office has an approved 3-year strategic plan to diversify and grow activities to support its fiscal and service objectives by trading internationally. This has a wider benefit to the Island of importing economic activity.

The Council of Ministers wishes to ensure the long term viability and financial success of the Post Office on the Island and to provide the best possible environment for the Isle of Man Post Office’s strategic plan to be successfully delivered. In order to do this, Council wishes to ensure that the corporate structure of the business is “fit for purpose” in the current operating environment and its relationship with its key stakeholders provides the appropriate control and support.

The Council of Ministers recognises that the Isle of Man Post Office is operating in a fully commercial environment and wishes for an investigation to be undertaken to determine the most appropriate corporate structure and governance model to sustain the ongoing operation of the Post Office.

The investigation and subsequent recommendations should take into account the needs of the Island but also draw on successful models from elsewhere. The output from the investigation will be an evidence based report making recommendations on the most appropriate corporate structure and governance regime for Isle of Man Post Office, which will initially be considered by the Council of Ministers, and if approved, form the basis of a debate/motion in Tynwald.

1.1 About the author The review was carried out by Elmar Toime, Director of E Toime Consulting Limited. Elmar Toime is an independent advisor to the postal sector, based in London. He is chairman of the Postea Group, Inc., a US-based postal technology company and is a member of the Supervisory Board of Deutsche Post DHL. He is also an independent non-executive director on the board of Qatar Post. Elmar was the chief executive of New Zealand Post Limited from 1993 to 2003. In 2003 he moved to the UK when he was appointed Executive Deputy Chairman of the Royal Mail Group, including chairman of the Royal Mail management board and chairman of GLS B.V. In 2004 Elmar was awarded a life-time achievement award for leadership in the postal industry. He has also served as a non- executive director in a number of stock exchange listed companies and has a deep interest in governance for state owned enterprises. He is a fellow of the Royal Society of Arts, Science and Manufactures in the UK and a fellow of the Institute of Management New Zealand.

Confidential 3 | P a g e 1.2 Isle of Man Meetings In depth meetings were held with Mr Eddie Teare, Treasury Minister, Mr Laurence Skelly, Minister for Economic Development, and Mr John Shimmin, Minister for Policy and Reform.

Individual meetings were held with Post Office Board members. These were with the Chairman, Mr Graham Cregeen MHK, independent member Mr Kurt Roosen, independent member Mr Brian Partington, and independent member Mr Kit Pemberton. Vice-chairman Mr Tony Wild MLC was not available.

Individual and shared meeting were held with the senior Post Office executive team. These were with Mike Kelly, Chief Executive, Lisa Duckworth, Commercial Director, Peter Cropper, Operations Director, and David Catlow, Finance Director. Peter Pell-Hiley, a consultant to the Post Office, was also interviewed.

Senior civil servants also participating in meetings were Will Greenhow, Chief Secretary, Yvette Mellor, Finance Director, Chris Corlett, CEO Department of Economic Development, Sheila Lowe, Chief Financial Officer, and Caldric Randall, Financial Controller.

The time and commitment and openness of the people spoken to was deeply appreciated. It is evident that there is care and concern for the well-being of the Isle of Man Post Office.

1.3 Guernsey Meetings Members of the Guernsey government and Guernsey Post were generous in their time and willingness to assist this project. Meetings were held face to face in Guernsey or by telephone. The project was described as a government of Isle of Man initiative to examine the governance structure of the Post Office.

1.4 Jersey Meetings Members of the Jersey government and Jersey Post made themselves available and generously provided background material to assist this project. Meetings were held face to face in Jersey and by telephone. The project was described as a government of Isle of Man initiative to examine the governance structure of the Post Office.

Confidential 4 | P a g e Executive Summary Background

The Isle of Man government has previously commissioned reviews that have examined how Statutory Boards should be governed. These reviews have consistently concluded that a company structure works best if commercial goals are a priority. In advanced economies there are no exceptions to a company structure for the Post, except for the United States.

The two over-riding objectives for every postal business are to meet financial targets, thus acting as a commercial business, and delivering the social obligations set out for it in public policy. The starting point for a governance structure is to have Tynwald clarity about the objectives of the Post Office in these two areas.

Thus government has two roles. It has to act as an owner of a commercial activity and it has to act as the regulator of postal policy. A governance structure fit for purpose has to accommodate both roles.

In reaching a conclusion about the optimal governance for the Post Office, its current business operations have been analysed at a high level and the postal companies of Jersey and Guernsey have been selected as the best benchmarks for useful comparisons. There are several pertinent case studies of business activities across all three Islands. In discussing particular instances of business decisions (and non-decisions) with the different stakeholders (from government side, from postal side, and from the political side) it seems that there is confusion about the principles of governance and about competence in execution. No governance structure eliminates all risk. Being concerned about the ability to deliver a business strategy is not a statement about governance. Discussion

The terms of reference for this review do not include an assessment of Post Office strategies. Nevertheless, its business circumstances are relevant. The Post Office is rightly concerned about its ability to deliver strong dividends in coming years as traditional mail volumes decline and competition in parcel delivery intensifies. This is its argument for diversification. It is vital to understand that the Post Office has two separate main business activities. On one hand it has the core Island postal activity, collecting and delivering mail, operating the post office network, and running a collectibles business. Along with its associated overheads, this business is more or less break-even. Its more profitable business is from international mailers who use the Isle of Man as a base for mail production and export. This is an intensely competitive and therefore vulnerable business. It is the source of present dividends.

The Post Office has this high dependence on export business in common with Jersey and Guernsey, and it is also this that differentiates the Isle of Man postal business from other, more mainstream postal companies. This business is largely reliant on a few, large customers who require agile and commercial customer relationships. They do not want to feel they are interacting with government agencies.

Confidential 5 | P a g e Is the Post Office at a cliff edge of profitability today? Probably not, but the more it fails to keep or generate new business, the more difficult it will be to prosper. It is never too early to prepare. The Isle of Man government of course can make decisions about this. By simply not requiring a dividend, or by eating into Post Office cash reserves, it can choose to be conservative in terms of business risk. But it should choose, and do so with eyes open. The international trend is to protect the universal social obligations, or reduce them slowly, while encouraging business growth in new areas. This is not diversification at all costs. It is sound commercial focus.

If the Post Office is able to grow, to create more jobs through export services, then this should not run into conflict with the Isle of Man ‘small government’ imperative. Growth in commercial activities means growth in the economy and should not be stifled by other civil service constraints. Having said that, how the Post Office competes within the private sector economy is a matter of public policy. The governance structure to be recommended will provide safeguards for government in this respect. It will also provide safeguards for the desired set of social obligations.

The examples of Jersey and Guernsey are instructive. Both transformed their Posts into companies with commercial boards consisting of non-executive private sector members and at least the CEO from the executive team. Both businesses are profitable and both suffered significant revenue loss when the UK removed Low Value Consignment Relief (LVCR). The consensus from Ministers, officials, and chairs is that the responsiveness of the business to this would not have been as successful had there been more direct political involvement. In both Islands the government has designated the Treasury Minister as the shareholder. Each Post has a Memorandum of Understanding (MOU) with the Minister that spells out expectations clearly. Political concerns are considered in a “no surprises” clause. Diversification, major capital spending, acquisitions, and divestments require Ministerial consent if they have not been signalled in a Minister agreed annual strategic plan.

In both countries the tangible benefits of creating companies at an arm’s length distance from government have been described in terms of the benefits of cultural change away from the civil service ethos to commercial thinking, the speed of response to major changes in their business base, and the ability to prioritise business choices. These may sound more as generalisations as opposed to specific numbers on the bottom line, but it is clear in Jersey and Guernsey that making the Posts into formal companies was positive in this respect.

This review recommends that the Isle of Man Post Office should be made a company operating under company law. This is based on first hand personal experience of working in that governance environment, at one further step removed from government involvement in day to day commercial affairs.

The tangible benefits to the Isle of Man economy of such a move will derive from an ongoing productivity focus on the core postal business and the ability to protect and further develop the commercial export business. While the Post Office is not a civil service organisation and has notional separation from civil service employment conditions, it runs the legacy risk of preserving a civil service culture. There have been times when the Post Office believed it had commercial justification to act differently to what was being mandated by government but could not do so. This is not to suggest business failure. However, the consensus in peer postal companies is that direct political interaction inhibits commercial behaviours.

Confidential 6 | P a g e The profits generated by the Post Office, which form the basis of its shareholder dividend potential, are from the commercial export business. The Post Office must have agility and commercial responsiveness to protect and grow this. At the heart of the issue is whether it can continue to do so with the current governance structure.

The options for the Post Office are to either remain as a Statutory Board or become a company. Not changing anything might appear the simplest thing to do. The Post Office might continue as it is doing and evolve as its environment changes. The disadvantages are several. It remains caught in the cycle of government budgeting, both for capital and employment numbers. The ongoing transformation to a more commercial internal culture will probably be slower. Business decisions will compete with political conflicts. Executives lose incentive.

By creating a state-owned company of the Post Office the government would be acknowledging the separation of commerciality and politics. The governance structure moves immediately to that of corporate law. Public policies (the social obligations of the Post) are protected by shareholder oversight and an appropriate MOU. This option would require legislative and administrative change.

Change always brings uncertainty and a degree of risk. Would this new Post threaten social obligations, employment conditions, executive remuneration, private sector competition, and so on? In principle, the company governance structure tied to an MOU gives the necessary protection. The lessons in other countries, and in Jersey and Guernsey in particular, is that shareholder supervision has to be effective. The MOU expresses a code of behaviour that includes how the company and shareholder executives are to interact.

If the Post Office is transformed into a company, the shareholder will be required to nominate a board. The main differences to the existing board composition will be that it will have no political members and it may include executives from the company. This is not a statement about the competence of the existing board. By creating a company, board members will have the sole fiduciary obligation to act in the best interests of the company. Political members have a natural conflict of interest, in that they have both political and commercial objectives. Even if these can be separated, the perception of conflict will always remain. Adding executive members to the board will ensure full ownership of board decisions. Recommendation

It is recommended that the Isle of Man Post Office becomes a company, with Treasury as shareholder. The Treasury and Economic Development Departments should draft an MOU for Tynwald approval that lays out what government expects from the Post. Corporate behaviour is determined under company law and this should be the principal independent form of regulation. The board should initially consist of non-executive directors and a chair appointed by the shareholder. The CEO should also be invited to join, with scope to include the Financial Director. Within Treasury a role of shareholder executive should be established to act as the regular point of contact between government and Post.

Finally, the transition process could be reasonably timed with the start of the new Post Office financial year, April 2016, and before the next September 2016 general election.

Confidential 7 | P a g e 2 RECOMMENDATIONS

The summary of recommendations is:

Section 10: It is recommended that the Isle of Man Post Office be created as a company owned by the Government of the Isle of Man and established under Isle of Man company law.

Section 10.1.1 It is recommended that the purpose, aims and objectives of the Post be documented in an MOU approved by Tynwald.

It is recommended that Treasury and Economic Development together draft a proposed MOU.

Section 10.1.2 It is recommended that the Shareholder is the Treasury Minister.

Section 10.1.3 It is recommended that a shareholder executive based in Treasury is appointed as the departmental liaison officer with the Post company.

Section 10.2 It is recommended that a non-political board is established to operate within the ambit of the corporate governance code, with a chairman appointed by the shareholder, and including on the board, in principle, the CEO.

Confidential 8 | P a g e 3 BACKGROUND AND CONTEXT

The Isle of Man Post Office (referred to as the Post Office in this report) has been and is successful, measured by financial results and community trust. This statement is made with confidence, based on wide experience of postal businesses in many countries, large and small.

In the discussions held with interested and influential parties in the Isle of Man, no materially different issues were raised that are not being experienced in postal businesses elsewhere. What are the longer term implications of the decline of business transactional mail and trends towards digital media? How best to capture the opportunities of packet and parcel delivery volumes from e-commerce and online shopping? What is the optimal size and composition of the post office network? And, in particular to this review, how to resolve the issues raised by a substantial and strong commercial entity owned by government but competing with the private sector in many areas?

One important difference in the Isle of Man is the Post Office’s dependence on international mail business. This is a highly competitive and profitable export activity that brings in offshore revenues. The trends, risks, and opportunities here are underestimated if people, perhaps simplistically, think of the Post Office as a postal business in traditional terms, as for example a miniature version of Royal Mail in the United Kingdom. A second area of difference in the Isle of Man that has implications for governance is the unique system of government under Tynwald. There is an immediacy and closeness to all activities on the island, including visibility of the Post Office’s actions.

The Post Office shares these two characteristics with its peers in Jersey and Guernsey and for that reason they have been chosen as potential benchmarks.

Since at least 2003 there have been proposals or recommendations to corporatise the Isle of Man Post Office. There appear to be different interpretations of the expression: “corporatisation”. In this report it is taken strictly to mean establishing the national postal activities under a company structure, operating under company law. The basic idea of establishing a postal organisation that operates under company governance rules was first established in the mid-1980s, probably first in Sweden and in New Zealand. There is therefore almost 30 years of international experience in postal reform.

The Review of the Scope and Structure of Government in the Isle of Man (the 2006 Review) completed in September 2006 looked at the Statutory Boards then in service and recommended in particular that the Post Office become a company. In Section 4.4 of that report the review committee looked at what they defined as Alternative Means of Delivering Government Services. Even today many of the observations made remain relevant. The review recognised that there were divergent views on the roles of Statutory Boards, which were seen both as public utilities and also as commercial entities. The 2006 Review concluded that the January 2006 report on the Strategic Direction of the Post Office, which allowed for business diversification and more efficient approval processes, did not go far enough. The 2006 Review recommended that the Post Office be made into a state- owned company and that direct political members on it or any Statutory Board were not needed. These recommendations were not implemented.

Confidential 9 | P a g e In 2012 the same review group was invited to reconsider the situation and produced a second report A Review of the Scope of Government in the Isle of Man (the 2012 Review). The review again suggested that a number of tests be applied when looking at government entities (section 3.9) that had commercial dimensions and it is worth summarising them here:

 If the service concerned is more commercial, then it is appropriate to look at alternative delivery models;

 It was necessary to look at the package of services and note that not all may fit the same delivery model;

 No government body should enter a market or continue if that service is provided by the private sector; and

 There should be fair competition.

As regards the Post Office, the review concluded that for it to continue to trade profitably it needed to become a corporate entity with the commercial freedoms that entailed, and that the Statutory Board structure was the “worst of all worlds” (Sections 4.6.62 - 66). However, it then went on to say that because the Post Office could not be accommodated inside the principles it had outlined, it should in fact be privatised. In other words, the 2012 Review went one step further than simply recommending a company structure for the Post Office.

It is evident from the various meetings and discussions held in this present study that there remain divergent views as to the aims and objectives of the Post Office.

In 2014 the Council of Ministers invited the Post Office to present a case for corporatisation in conjunction with a strategic plan. Several meetings to discuss the topic took place throughout the year and on 11 Dec 2014 the Council deferred any decision having felt that the case for tangible benefits had not been made. The Post Office presented its latest Strategic Plan 2015-2018 to the Council of Ministers on 25 June 2015 calling for a ‘step change’ in its business activity. The Plan was deferred at this meeting and the Council called for this review.

Confidential 10 | P a g e 4 PURPOSE OF THE POST

4.1 What is the Post for? The critical step in deciding the governance and structure of a national postal entity is to debate and understand why the Post exists. This does require a brief examination of how it has evolved, what is its present condition, and the forces acting on its future. It is a matter for government to decide what it wants from the national postal operator, but there has to be clarity about this. There must be a protocol to document current expectations and to outline processes for change as trends emerge.

Around the world there are many different purposes and expectations of the Post, some unambiguous and others hidden in various guises. The recurring theme in this report will be to insist on clarity and openness. There are no right and wrong positions for governments to take. But it’s a better world if the policy preferences are explicit.

There is general agreement that the Post is there to deliver mail, but even here the expectation can range from being a part of a communications infrastructure (in the past, of course, this was how people and businesses communicated) to being a logistics partner (delivering goods in the form of packets and parcels). In the network of post offices, a wide range of financial and information services has developed, so much so that the logistics (postal) element is often a minor consideration. Post offices have emerged as places that may define small communities and therefore represent something bigger than just being the face of the Post. Another feature is the civil service culture from which the postal service originated and which can clash with commercial expectations. Protection both of jobs and of employment conditions is often also an implicit expectation but one that is less often allowed to emerge when policy targets are formalised.

To summarise, the Post is part of national infrastructure with social obligations. It is defined as a national communications and delivery system for letters and parcels with an expectation both of universal pricing and of universal service. Further, through the post office network it is also a community asset, bringing financial and government services to citizens.

Whatever the expectation of postal services, governments everywhere have also imposed a commercial directive on the Post. Some infrastructure services (for example roads, schooling, or national security) are not charged for directly and appear ‘free’ for citizens, paid via taxation or levies. Others, such as public transport or telecommunications, are paid for as they are used. It is the universal expectation, with no known exceptions in the world, that postal services are to be paid for directly, usually by senders, but sometimes also by receivers (e.g. Post Office box addresses). Postal services are not free. Therefore, management of the service has a commercial dimension and businesses and governments are by far the biggest sources of postal revenues.

If we see Post as an infrastructure service, paid for by users, then it should be efficient. Prices should be as low as possible while sustaining the universal service. If this is not the case, for example if the monopoly position of the postal service is used to raise prices well above the cost of providing those services, then it is in effect an indirect tax. Similarly, if some services are required to be provided at below cost, for example small post offices or free literature for the blind, then internal cross-subsidies are at play. Confidential 11 | P a g e Again, there is nothing wrong with any of this. But transparent government and transparent governance should be in place, ensuring choices about policy are being made with eyes open.

If, on the other hand, we see Post as a commercial operation, as a business, then we have to also understand the consequences. In a market economy it has to be a fair competitor. It has to reward those who have a stake in it. Customers have to get value for money for the services they buy. Employees have to be rewarded for their efforts. And, the owners of the assets of the business, the shareholders, have to be rewarded for their investment. This applies equally if the shareholder is government or the private sector.

4.2 Public Policy Objectives for the Post In developed economies the universal objective of governments, as owners of the national postal operator, is for the Post to reach and maintain a position of financial independence. This generally means that trading revenues should exceed the costs of running the business, and that sufficient cash is generated for reinvestment. Dividends, annual payments to the government in recognition of the assets it has invested in the postal business, do not seem to be universally demanded. There appear to be political trade-offs here: sometimes to keep prices down, sometimes to preserve jobs surplus to needs, sometimes to leave cash in the business for modernisation projects. None of this is new of course to the debates about the Post Office in the Isle of Man.

Hand in hand with the profitability requirement are a number of other public policy options available to governments. These expectations for what the Post is required or expected to do are sometimes enshrined in postal law, sometimes in regulations determined by government from time to time, and sometimes by tradition or public expectation. Given the rapidly changing postal environment today, this review recommends the clear expression of postal public policy in a format that can be changed by government debate, rather than cementing details into law. In peer postal companies (for example in Jersey and Guernsey) this takes the form of a Memorandum of Understanding (MOU) between government and the postal company.

The most obvious postal policy is the definition of the basic service expected of the Post. There is an expectation for basic letter services that a universal single postage price will guarantee delivery to all national addresses, the so-called universal service obligation (USO). In developed economies this may be five or six days a week, although it is noted that New Zealand implemented a three-day service in 2015. Most commentators do not expect that a six-day service will be sustainable in the longer term, as measured in years not decades. This has not been raised as an issue in the Isle of Man under the present operation and performance of the Post Office. It is noted that in Jersey and Guernsey the letter delivery USO moved from six to five days some years ago.

Confidential 12 | P a g e One of the benefits given to postal companies to compensate for the USO has been a monopoly status for basic letter mail services. This takes a number of forms: exemption from VAT, private competitors prohibited from offering services, access to the unique national stamp designation, being the designated operator for incoming international mail, and regulated price movements. This environment is changing and monopoly status as determined by law has been removed in many countries. Again, it would not seem to be a make or break issue in the Isle of Man, except to comment that there could be an argument to liberalise the market if the Post Office was given unfettered commercial freedoms.

A second dimension to postal public policy concerns the size, scope, and management structure of the post office network. The plan in the Isle of Man to convert the last Post Office owned post offices to agencies (sub-post offices) is a case in point. The arguments relate to community matters. These are real and many believe have an over-arching economic benefit. The point to make is that this community service is paid for (largely) by the bigger business mail customers via postage. There is nothing wrong with that but under some circumstances this could be shown to represent a hidden cross-subsidy. Uneconomic post offices are supported by large mail users who do not use retail counters.

This review is not meant to argue one way or another for how to perceive the Isle of Man Post Office. The aim is to point out the key elements of public policy that will shape the acceptance of governance recommendations that will be made here.

Figure 1: Market segments for the postal letter market One way of characterising the mail delivery USO can be shown in this diagram.

The postal operator in a country can be defined by its efficiency and by its competitiveness. In this example price is a proxy for competitiveness, with low postage prices indicating a more competitive business. Efficiency can be measured by the unit cost to handle and deliver an item of mail. A postal business that is not efficient and with artificially low prices needs to be subsidised. Raising prices may remove the need for subsidy but will reduce competitiveness if costs are not also addressed. A business in that situation needs to be protected from market forces, usually by keeping the postal letter monopoly. Market power occurs when the business is able to be highly profitable in the absence of competition. The competitive sector, market prices and market efficiencies, can be said to be the stated goal of most Western economies.

Confidential 13 | P a g e The Isle of Man government should be clear about where it wants the Post Office to be in this analysis, and to understand the consequences. There does not seem to be a consensus as to where the Post Office presently sits in this matrix. Some Ministers have intimated that unit labour costs seem high. Other parties feel that competition is not an issue and that pricing pressure is not an issue. This contrasts with Treasury budgeted dividend expectations.

The aim here is not to examine the Post Office’s actual state of affairs, which is outside the brief. It has been to offer a policy framework for government.

From this general analysis of public policy, it follows that government has two distinct roles in relation to the Post. On one hand it is the owner of a trading business, which has the objective of providing its designated services at no cost to the taxpayer: users pay for the services they get. On the other hand, government determines social policies for the benefit of citizens and the country, and these policies may require certain behaviours of the Post, some of which may conflict with its trading objectives.

4.2.1 Government as owner When it acts as the owner of the postal enterprise, government should behave as though it were a shareholder. The Post represents a sizable investment by government, in terms of jobs, buildings and land, technology and systems. The owner has well-understood expectations of these resources and assets. It expects propriety in behaviour, financial discipline, non-corrupt business practices, risk-taking appropriate to the nature and scale of the business, economic prudence, and a return on its investment, perhaps by way of dividends or by community services.

When discussed in these terms, a commercial model is appropriate for the Post. This has implications for governance structure and the ways in which government chooses to intervene to influence business directions. A commercial structure is best served by company status. This is because it automatically defines governance: the corporate code established in law. It creates a board with members who must act in the best interests of the company.

The company model of governance also requires the shareholder to be defined. Because the language here is about markets and shareholders and returns on investment, this aspect of government control is typically left to the equivalent of the Treasury department of government. Treasury would be a logical shareholder.

Confidential 14 | P a g e 4.2.2 Government setting social policy The government also requires the Post to support a number of social policies, usually ones related to infrastructure services. Universal service, post office networks, defined service standards over six days per week are typical examples. Protection of employment conditions (or, control of working conditions), protection of jobs, ensuring competition in the markets served are other examples of social policies that are sometimes applied implicitly. Free literature for the blind, subsidised postage for printed matter, acceptance of conditions required from the Universal Postal Union (UPU) are other examples of social services usually required of the Post and which costs it must absorb.

These policies are all ones that are determined by political process. In many countries they are taken for granted or accepted by tradition, but in every instance it represents a policy of government, because it is usually only able to be changed by government. Sometimes, when these public service requirements are not documented or laid out in laws and regulations or written agreements, there is the impression that they can be changed unilaterally by the Post. It is our experience that this never has a happy outcome.

It is also necessary to recognise that public policy must also be able to evolve. By definition, regulations are backwards looking. They are the conclusion of studies that happened in the past and they are implemented accordingly. This is especially relevant for the Post today, given the basic transitions now happening in society as digital media evolves.

A modern debate about the social policy expectations for the Post has to simultaneously acknowledge the expectation of citizens today, expectations based solely on past experience, and to recognise tomorrow will be different. Thus, in setting the governance structure for the Post Office, the system selected has to do both jobs: meet citizen needs today and allow for future debate.

4.2.3 Implications for postal policy When this review makes its conclusions about the optimal governance structure for the Post Office it will be based on the principles that have been outlined here.

There must be a system of public accountability that allows for Tynwald scrutiny, regulatory and competitive compliance, transparency in public policy directives, and processes for legitimate questions about governance. At the same time, the commercial obligations and requirements of the postal business have to be understood. There ought to be an open process to deal with circumstances that arise in which business decisions may be in conflict with social obligations or broader government policy.

Confidential 15 | P a g e This conflict can be illustrated with the following example. It is based on actual occurrences in the Isle of Man but the objective of using it as a case study here is to examine the strengths and weaknesses of how things have been done in the past. Let us suppose that the Post Office makes a business case to acquire a private company currently operating on the Island. Typically, management will bring the case to the Board for approval. Let us further suppose that the case is convincing from a commercial, shareholder perspective. It will add value to the business. The conflict is now between shareholder value creation and the impact of competition on the island. Each one of us will have our own opinion but where in government is this to be resolved? It cannot, in this review’s opinion, be left to a single authority. It needs debate between at least two agents of government, each representing a point of view. If it cannot be resolved at that stage, the obvious next step is to escalate to the Council of Ministers.

There are numerous examples that have arisen in the past in the Isle of Man, and there will be more to come, that highlight conflicts between policy and business priorities. This review will recommend processes based on experiences in other postal jurisdictions and will use examples already experienced in the Isle of Man to work through the issues. To do this properly however will require clarity in the expectations of Tynwald for the Post Office.

Confidential 16 | P a g e 4.2.4 Policy for state-owned enterprises This review is concerned solely with governance for the Isle of Man Post Office even though the principles outlined here have wider application for the other Statutory Boards. Concerns about this were raised during discussions. It would be a shame if that then led to deferral of any decisions about the Post Office, pending a wider review.

A solution might be to recognise a new class of commercial entity. Elsewhere these are formally called State-Owned Enterprises (SOEs). There might be a case to establish a governance structure enshrined in law that dealt with the expectations and high level behaviours of these entities. The law would apply to all, and the organisations that would fall under its control would be named according to Ministerial regulation. The model for this is the New Zealand State-Owned Enterprises Act.

This piece of legislation outlined the liabilities, the level of government guarantees that might apply to commercial behaviours, and the governance structure and ownership models.

4.3 Expectations for a National Postal Operator To conclude this section a model of how government might wish to see its postal operator perform has been outlined. In summary:

 There must be a statement of purpose to give clarity of expectation and to be able to explain simply its activities. An example might be “Post is the custodian of messages, goods, and financial transactions” to identify its role in delivery of letters and parcels, and its activities in post offices.

 There should be a set of business principles that reflect both its commercial objectives and its social objectives. For example, these might be for each stakeholder group:

• Shareholder: Investments that add value and operations that deliver profits commensurate with the market place

• Customer: Competitive advantage through lowest costs and lowest prices

• Citizens: Responsibility for the agreed social obligations and to be a good corporate citizen

• Employees: A great place to work.

 These statements are not meant to be recommendations. They illustrate ways to resolve the competing forces that act on decision-making for an entity like the Post that has numerous stakeholders. This is not about maximising profits or preservation of historical service features. It is about optimising decision- making that demonstrates openly the understanding of the unique environment of the postal sector.

Confidential 17 | P a g e 5 ISLE OF MAN POST OFFICE

This review is not about the strategies and business priorities of the Post Office or of its internal structure. That is likely to be an outcome of any new governance structure that may be put in place. The discussions held with key individuals have raised questions about strategy and direction, and it is inevitable that there are a wide range of views on that topic. This may well be a second review that could be conducted.

This review is also not about competence. It is apparent that many of the case studies being used to highlight perceived governance deficiencies seem to move between issues of structure and process, and issues of competence. Errors and misjudgements occur under the best of governance systems. The objective is to build methods of assessing and recognising risks, and dealing with those. There is a difference between rejecting a business strategy because it does not fit with the agreed scope of the business, and rejecting it because it is felt the business will lack the skills to implement. Yet the same case study was raised in several discussions but with different reasons given for why it did not proceed.

It is only a slight exaggeration to say that every conversation held in this review used these expressions: “crying wolf”; “there is/isn’t a cliff edge”; “too many decision-makers”; “smaller, smarter, stronger government”; and “over my dead body”. These reflect the strongly held views of individuals. What seemed to be missing was a strongly held view from Tynwald.

5.1 The postal environment for the Isle of Man In its presentation to the Council of Ministers the Post Office in June 2015 said that in its view the level of profitability earned over the years was becoming harder, if not impossible, to maintain under its perceived limits to diversification. The demand from Treasury for an annual £2 million dividend would not be possible without drawing on cash reserves in the short term, and simply not achievable after that.

There is no fault with the argument that the two principal areas of business for the Post Office are in decline. Transactional mail (bank statements, bills and invoices, utility notices and so on) is being replaced at pace. This is being experienced in all developed countries to varying degree, from a few per cent per annum volume decline to double figures. Printed matter (magazines, newspapers, catalogues, etc.) is also in decline. Because the last mile delivery network is largely a fixed cost, volume falls hit the bottom line immediately.

The second critical area, government payment services and cash bank and agency transactions at post offices are also in decline and are likely to vanish in a generation. Indeed, all government departments are actively trying to reduce their costs by directing citizens to digital services. As the Post Office has shown, there are new government services which can be transacted at the post office counter to offset some of this decline. Again, the pressures and opportunities being experienced in Isle of Man post offices are the same everywhere. The solutions are similar also. Reduction in Post-owned outlets and a greater use of agencies with variable remuneration franchises.

Confidential 18 | P a g e Where the Post Office is significantly different to the postal company of a larger country is its sizable international mailing business. Because the postage rate across island is the same as the rate to any UK destination, it provides opportunities for international mailers to use the Isle of Man as a base for mail production. It cannot be emphasised enough that this is a highly competitive business. The Post Office has been successful over a number of years by taking a commercial and effective sales strategy for this business. But it is exposed to offshore forces. For critical commercial reasons the Post Office cannot be expected to publicise its detailed accounts, but it is vulnerable to a few large customers.

This vulnerability can be measured by Total Contract Value (TCV). This measures not just the annual contribution of a contract customer, but the expected returns over the period of the contract. The Post Office advises that none of its large customers for international mail have committed to more than a year. This is a real risk and it requires a very good sales and marketing team to keep securing existing business or finding new customers. In other words, the Post Office has nearly all its profitability from highly competitive international business.

The Post Office kindly made its accounts available for analysis. For obvious commercial reasons this analysis will not be disclosed in detail here. To understand the business better, it can be viewed in a number of segments: post office network, collectibles, core mail services (the function of delivering and collecting mail for local and international delivery), commercial services (as described above), and administrative overheads.

There are two important conclusions. The first is that the collective Island related business (post offices, collectibles, core mail, and associated admin overheads) is more or less breakeven. This is a reasonable result. It basically means that if all the Post Office did was to attend to attend to the needs of customers and citizens, today it pays its way. To continue to do so is the challenge. The levers of profitability available are prices of postage, productivity of its workforce, and scope of its USO (post office network, quality of service, frequency of services). Furthermore, under this situation some governments require a fair rate of return on the postal business’s revenues. That would challenge the Post Office today.

The second conclusion is that the source of the company’s profitability is its commercial competitive (and international) business activity. The rate of return here is currently good, and it is this area that allows the current dividend policy to be achieved. Maintaining or growing this is challenging and is the source of the Post Office’s concern for the future. It should also be pointed out that the international large business customers that choose to use the Post Office services expect commercial behaviours from the Post. They expect to deal with agile, flexible decision-making and excellence in service attentiveness.

To be fair to the Post Office Board and Management, there are no doubts about the need to provide the existing universal services. The acknowledged cost of the post office network (a net loss in accounting terms) is being dealt with, particularly with efforts to find new services that could be provided at retail counters, especially for government agencies. The case the Post Office makes in its Strategic Plan is to explain that the ability to continue to provide support for the USO and the post office network depends on the business’s success in generating cash elsewhere.

Confidential 19 | P a g e 5.2 The Case for Urgency The Post Office in recent years has made submissions to the Council of Ministers for some urgency in resolving its ability to act in what it says is a more commercial manner. It has presented strategic plans that show the impact of a decline in traditional business and the risks to its existing competitive business. The financial consequences of these trends will be risk to the annual dividend of £2 million factored into the Isle of Man budgets and gradual erosion of its cash reserves.

Two sets of phrases are used. “There is a cliff edge” – meaning that this impossibility to meet the demands of the government for dividends will cause the company to fall into a loss- making state, something that will be very difficult to recover from.

The second phrase in response is that Post Office has been ‘crying wolf’. That is to say it has regularly advised it is heading for deep financial trouble, but always manages to pull a good result out of the hat.

There is merit in the argument that the time to arrest declining profitability is to diversify before that happens, to use the good times early enough to invest in new areas. The language of ‘cliff edge’ is emotive. If the company doesn’t diversify, doesn’t find new sources of business, then more drastic action may eventually be necessary. For example, by reducing days per week mail is delivered, by major price increases that will worsen the loss of mail volumes, by the closure of sub-post offices, etc.

It is a different challenge for managers to be working out how to reduce costs through changes in services and employment conditions compared to building and investing in new areas. Of course, it should be expected that they do both. The trend today is to try to balance these two different approaches. The aim is to keep a level of profitability and quality of service that earns respect for the postal brand while at the same time diversifying and ensuring a strong presence in new growth areas.

This review has not been tasked with assessing the record of the Post Office structure inside the business and its efforts and Strategic Plan. However, the language used of difficult times to preserve the existing service expectations from the Post Office is endorsed.

5.3 Isle of Man Government Policy for the Post The central element of this review is the question of whether the corporate structure of the Post Office is ‘fit for purpose’. The context for this question is to ensure that “its relationship with key stakeholders provides the appropriate control and support”. In investigating how key government stakeholders seem to be interacting with postal matters, there does appear to be conflict. Part of this appears to be because of lack of clarity as to where direction should come from. Accordingly, decision-makers are making calls based on expectations of stakeholder reaction and this is not ideal for the complex operating environment for a postal business.

There are several public policy areas that need clarification even before recommendations for the corporate structure can be made.

Confidential 20 | P a g e 5.3.1 Small Government The Post Office has wished at times to make private company acquisitions. Ordinarily, these would be analysed for of risk, size appropriate to the resources of the Post Office, competence to manage, strategic direction, and so on.

Any acquisition would increase the size of the Post Office, in terms of employee numbers, assets controlled, and, in due course, profitability. In a broad definition of what constitutes government, this would increase the size of the public sector, since the Post Office is an entity of government. The Department of Economic Development (DED), which is responsible for the Post Office Statutory Board, maintains that any such growth would be contrary to fundamental Isle of Man government policy to contain the size of government.

The Isle of Man Budget 2015-2016 records details of the financial affairs of the country. It includes in high level terms the revenues, costs, and employee numbers of the Post Office as line items in the national totals. As a state owned asset this is appropriate as it gives a picture of the full public sector.

However, it would be misleading to say that, for example, growth in public sector employment caused by growth in Post Office employees for whatever reason was counter to a ‘small government’ policy. If it were, one could push for greater outsourcing, handing over core services such as delivery, as an aim for the business. Privatisation at its extreme would lead to smaller government.

The Post Office takes opportunities for growth in order to increase profitability. Sometimes this growth may also lead to a temporary increase in employment – a one-off fulfilment service for example. This will increase full time equivalent reporting which ultimately will be seen in increased total employment figures for the government sector. It would also increase national employment levels and in that context would be an economic benefit.

The Council of Minsters should obtain from Tynwald a direction as to whether growth in the Post Office – whether in revenues or number of employees – is an issue for the smaller government policy. It is the view of this report that a commercial trading entity owned by the state, such as the Post Office, should not be prevented from expansion based on a smaller government mandate.

5.3.2 Competition Impact and Economic Growth A second important area for government policy is the impact on competitive markets through business growth opportunities pursued by the Post Office. A second reason given by Ministers concerned with growth investments being sought by the Post Office is that a strong, government entity may have unfair advantages as a competitor on the Isle of Man. There seemed to be support for activities that brought new business into the Island, from the UK or further overseas. (We note in saying this that it also leads to larger government under the definitions currently in force.)

Confidential 21 | P a g e In a small economy such as the Isle of Man the presence of the Post Office as a direct competitor is likely to be noticed. For example, and citing instances that have been put on the table by the Post Office, to acquire one of the two private companies providing a specialist service is going to affect the other company. It also has the effect of reducing the size of the private sector.

It may on balance increase the overall economy of the Isle of Man if the synergies and new business opportunities created by any such investment led to revenues that would not otherwise have come to the Island. This in fact is the case put forward by the Post Office to justify its acquisition intentions.

The reason these business strategies even emerge is consistent with business behaviour in all developed postal companies. In order to grow their business base Posts have expanded along the so-called value chain. Where once Posts simply received mail, sorted, and delivered it, they began to look further along the process in each direction. The physical printing and enveloping of the mail, all generated by computer data, seemed a logical extension and in many countries the postal companies were the first to bring more sophisticated data management technology to the process. Elsewhere it was done by the private sector, but this mainly occurred when Posts were late in making the investment. On the delivery side, investing in multiple forms of delivery (parcel locker technology, collect in store, returns systems, parcel boxes etc.) are other forms of potential investment. In post offices the postal companies saw a need for a different or fresh approach to service and created postal banks or insurance companies and so on. To improve delivery, postal companies acquired or created express (time-certain delivery) operations in order to meet new competitive forces.

In summary, a modern postal business is defined by the breadth and diversification of its business base. The diversification and growth has been achieved by all the means possible: acquisition of existing companies, investment in start-ups, joint ventures, and so on. There are exceptions in Western economies to this diversification, and there are gradations in the extent to which such business policies have been pursued. At one extreme, the Unites States Postal Service (USPS), a federal government institution, is prohibited from expanding into sectors served by private operators. This is an active debate in the USA even now, because the traditional business base of mails has fallen so significantly. At another end, postal companies in France, Switzerland, New Zealand to name a few have been able to acquire and create entirely new businesses that compete fully with private sector peers. Royal Mail in the UK would be an example of a business that has not diversified much into the postal value chain and of course, there, the post office network is completely divested into a separate state owned company.

The scale of the Isle of Man economy is much less than these overseas examples. The intervention of the Post Office into the private sector economy may carry a more significant impact. However, the forces acting on the Post Office to consider these new growth paths are the same: a decline in core mail delivery with economies of scale burdens as a result. The strategies to address this can only be:

 to grow (and thereby cross-subsidise community service obligations from new competitive business),

 to contain services (as for example changing Crown post offices to agencies or reduce delivery frequency),

Confidential 22 | P a g e  to increase monopoly prices, or

 to achieve good and ongoing productivity growth in existing operations.

This section of the report is concerned with growth strategies. To test the implications for government policy let us pose the following scenario. The Post Office makes a business case to acquire one of two private operators in a specialist market segment. Both of these operators are Isle of Man companies. This scenario is not concerned with the solidity of the business case. That’s another issue, an important one of course, and one that needs to be addressed when discussing optimal structures for governance.

Firstly and foremost, is it an express Tynwald policy that this should not happen? That a government entity should not acquire a private sector company, based on either competition concerns or simply, it just shouldn't happen? As mentioned before, that would be the case in the United States, but probably not anywhere else. It is a perfectly legitimate element of public policy but there does not seem to be clarity about this in the Isle of Man from people interviewed.

If a recommendation is asked from this review, it would be to say that the Post Office Statutory Board should not be prevented from making private sector acquisitions solely as a matter of public policy or small government.

A number of other conditions might be imposed (size of investment, risk, management competence, provable economic growth) but these can all be dealt with under the governance structure that will be proposed.

It may well be the case that competition concerns for the Isle of Man economy over-ride the business case. How are these concerns to be assessed? It is not the job of the Post Office board to be the guardian of this. Naturally, if precedent or obvious competition difficulties are foreseen, then the Post Office may decide not to pursue the matter.

It is the view here also that it is also not the job of a Ministry or civil servant officials to decide one way or another unilaterally. A Minster simply should not be able to instruct an official to call the Post Office CEO and suggest that an acquisition not proceed. It may well be a correct decision, but the risk of conflicts of interest and lack of transparency are too great. The conflict can happen at all levels. A Minister may be exposing him or herself. The official may have a vested interest. The postal management or chairman may accede simply to earn goodwill on this occasion, and so on.

The State competition authority, in the case of the Isle of Man it is the Office of Fair Trading (OFT), is instituted one would have thought for precisely this reason. You can be sure competitors who feel threatened by any postal incursion into the private sector will demand an OFT investigation. While this becomes more cumbersome and has an efficiency cost, it has the merits of full transparency, and it leaves it to the designated officials acting under the laws that established them to rule on the competitive impact. In the longer run this serves as an effective guide to future Post Office intentions.

By way of example, the Council may be aware that the European Commission competition authority has recently approved the acquisition of TNT Express by FedEx, the US express operator. Previously, the same acquisition attempt by UPS (United Parcel Service) had been turned down because it was felt to reduce competition by too much.

Confidential 23 | P a g e In conclusion, if it is not a matter of directly expressed government policy, the Post Office should be permitted to invest in new business and make acquisitions, subject to governance controls to be prescribed.

The foregoing arguments would seem to apply equally to other Statutory Boards. The difference with the Post Office is that it also has community obligations of a particular kind, and these are discussed below.

5.3.3 Community Obligations A third area requiring Tynwald policy guidelines concerns the ‘must have’ service requirements to be assured by the Post Office. These are the so-called universal service obligations. When we look around the world these are typically based on historical expectations of communities.

5.3.3.1 Post office network

As already mentioned, the number, presence, and services offered from post offices is one such obligation. The postal business will have a view about these, driven by cost and service considerations. The community may have different view based on sense of local identity, preservation of local businesses, or access to services that otherwise might be difficult to reach.

In the Isle of Man, post offices are now what are called agencies or “sub-post offices” operated from within a private store and with private sector employees. The technology, work processes, and services offered are usually prescribed by the post office. Remuneration patterns vary around the world from a purely variable revenue model (a fee per transaction or a percentage of postage sold) to a fixed fee payable regardless of levels of transactions, perhaps topped up by marginal fees if volumes exceed a certain amount.

A few countries have now separated the retail counters network from the postal company altogether. In the UK it is a separate company, Post Office Limited. In Germany and the Netherlands, the post office network has moved to the separate Postbank company. In all three countries the Post has a long term contract that allows the post offices to continue being postal services agents. In other European countries post offices remain solely within the ownership and control of the parent postal company, as for example in France and Italy. However, in these countries there are usually strong financial services provided that underpin the network’s (marginal) viability.

The number of post offices, whether owned or agencies, is frequently also a public policy determination. This requirement can be stipulated in general terms, and changes to it may perhaps only be done by reference back to Ministers of government as a whole. There does not seem to be any further pressure here in the Isle of Man on this score.

The Isle of Man Post Office appears prepared to commit to its current level of subsidy and there seem to be no pressures to change things once the crown office conversion is completed. At the same time the Post Office is also investing in new digital services that will allow citizens to transact government business at post offices. This again is doing what is being done elsewhere in the world and shows the Post Office’s understanding of the roles it plays in the community. Confidential 24 | P a g e To underpin the community obligation to maintain the post office network, the Post Office should be required to seek Council of Ministers approval should it wish to reduce the network in size. The recommendation here is to a broader body than simply one or two Ministers or government departments. It recognises the intimacy of politics on the island and ensures political debate.

5.3.3.2 Delivery obligations

A second community concern is usually to do with delivery frequency and standards. There does not appear to any debate on the Isle of Man about these – a six day, next day delivery objective matches the principal trading partner, Royal Mail. As mentioned previously. Jersey and Guernsey have moved to five-day mail services (and six-day parcel services).

It is understood that any change to this standard would certainly be referred to Tynwald. Again this seems appropriate, but it remains an implicit understanding. There is also a sense everywhere that such a high level standard for ordinary mail is unlikely to be required in the more distant future (as opposed to express or e-commerce parcel delivery which increasingly is being trialled almost as a 24/7 service expectation in a few places overseas).

For this reason, it is suggested that the service conditions required of the Post Office for its monopoly service, the carriage of letters, is determined in contractual form, rather than in legislation. This flexibility already exists in the Isle of Man and should not be compromised. An efficient and effective approach would be to agree a Memorandum of Understanding between the government and the Post Office. This MOU would be ‘owned’ by an appropriate Ministerial department but could only be changed through Ministerial recommendation to Tynwald via the Council of Ministers.

5.3.3.3 Pricing

Currently the Post Office sets its own prices for the letter mail service. Pricing proposals are debated by the Board and agreed.

As in all postal companies, these internal debates look at both the reality of the situation (for example the size of the contribution that business makes), the community and political effects (public expectation of ‘fair and reasonable’), public relations and impact on the brand, and competition (will it drive customers away from mail for example). These are normal and reasonable internal debates.

Confidential 25 | P a g e To put it into perspective, at 42p for the basic letter price (and the other pricing schedules founded on this base) the Post Office is broadly at break-even for the core postal activity. For a commercial business that needs to be profitable to fund both future investment and renewal and to pay dividends, this may be seen as insufficient. It represents an interesting dilemma for government. For example, and purely for argument’s sake (as the numbers have not been verified) say that a 10p price increase (and without loss of volume) generated £500,000 new revenue and therefore new profit for the Post Office. This profit could be extracted as either new dividend or used as new investment funding. How does government decide this trade-off? How does government decide the political impact of such a price rise against the Treasury benefits?

To illustrate the dilemma, Deutsche Post in Germany has just won approval to increase the basic postage from 62 €cents to 70 €cents from 1 Jan 2016. The public outcry is occurring as expected, but the share price of the fully privatised company has outperformed the market. The public also benefits from the price rise in this indirect manner.

In many countries where the Post has a de facto monopoly (if not a legislated monopoly) a regulatory body is given the task of approving the basic letter rate tariff. Regulators have a number of tests (community impact, cost inflation within the Post, productivity achievements and so on). Again, in a small economy as the Isle of Man this could become an overblown process and no changes are recommended. Care must be taken to ensure that changes to the Post Office governance structure, with the aim of maintaining its overall performance, don’t lead to increased regulatory and governance costs in other parts of government. That would defeat the purpose of change.

The protection that the government could ask of the Post is to limit any price increase to one that produced an ‘acceptable’ profit margin. In profitable Posts this might be tied to market expectations of profitability in the sector. In the Isle of Man case it might be tied to a target number.

5.3.3.4 Employment Policy

An important area where the postal service interacts with community and political expectations is to do with conditions of employment. To ensure proper terminology, it has been agreed with the Isle of Man Treasury that Post Office employees are public sector employees, or public servants, but not civil servants. This is confirmed by employment practices that decouple Post Office employment terms from those of civil servants. The sizable and properly funded Pension Fund is a case in point. This is managed by Trustees independently of government pension funds.

Apart from further strengthening the argument that the Post Office Statutory Board could be seen as outside government when compiling government statistics, it does lead to a discussion as to whether Tynwald wishes to see that level of independence maintained.

If the Post Office were to be a company and still wholly owned by government, it might be expected that they would have full control of employment conditions. In fact, it would be a necessary step to ensure each employee understood that point.

Confidential 26 | P a g e This again is an area that lacks clarity. During recent economic constraints it is understood the Isle of Man government imposed salary freezes for civil servants. These freezes were adopted by the Post Office. It is not clear by which formal process this instruction was delivered, again perhaps an example of uncertain governance. Without wishing to argue the propriety or correctness of this, one could imagine an environment where the Post Office was performing very well financially but was required to adopt severe pay conditions because of government circumstances. This occurs because the ‘public servant’ umbrella falls over all State entities. But from the management and employee perspective it may not be fair.

The reverse situation is also possible. It has been the experience in Jersey and Guernsey that civil service pay rates increased at a time they would have been unsustainable for the Post and were in fact not adopted.

The point of this discourse is to bring to the table the desire to which it is government policy that ‘one size fits all’ when it comes to employment conditions, or rather can government be prepared for a well-governed Post Office to set its own employment terms?

The matter cuts both ways also. There may be difficult times for the Post when it may need to curtail pay rises. It is generally accepted that employment conditions and pay levels are more generous for public servants than for private sector companies. In fact, this is one of the legacy reasons postal companies are left with the letter monopoly – to preserve both jobs and employment conditions. The Isle of Man Post Office is no exception and Treasury has expressed a view that the Post Office has failed to address these sorts of productivity and employment benefits that make it less competitive.

No one wants to see companies reduce employment conditions for their workforce. In a competitive environment that can only be achieved through greater productivity and economies of scale. In a monopoly environment, preserving conditions can only be achieved by productivity in work processes, price increases, and subsidies from elsewhere. Even if only a consequence of its infrastructure role, a postal company does have a responsibility to show progress against productivity objectives. And these may mean a lowering of conditions of employment to meet market conditions.

A secondary issue concerns the situation of different working conditions for employees working side by side. In countries where the Post has had a civil service background, new employees may well have different conditions as compared to legacy employees. This is the case in Royal Mail. In fact, as part of the privatisation process, the government took over the pension liabilities of legacy employees. In Deutsche Post, German civil servant legacy pension obligations are being paid in part from the cash generated from global competitive businesses. In Jersey, a new, lower pay grade of ‘postal operator’ was created that fitted better with market conditions and which was applied to all new employees.

The situation can also arise should the Post Office take over a private company, making the employees now part of the Post Office structure. There appear to be differences of opinion as to the legal implications and legal advice has been sought from Treasury to decide. It would appear that employees can work side by side with different conditions. This may be unfair or undesirable from an employment policy point of view, and it clearly has to be a factor in the business case to bring those employees on board. As shown above, there are numerous examples in the Post of ‘new’ employees working alongside ‘legacy’ employees with lesser pay scales and pension terms.

Confidential 27 | P a g e A third issue raised in the context of the Post Office is its inability to reward good performance through bonus structures. This is more properly an internal company issue about the correct structure of pay: fixed remuneration, variable pay, benefits, and total remuneration. The Post Office management feels constrained in its ability to review and exercise discretion in these areas because of implied or unclear controls.

The global postal world does see remuneration arrangements, especially for senior management, as contentious issues. For well-established postal companies, supervisory boards insist on market comparisons and recommend pay levels based on multiple factors. In others, governments impose a CEO maximum, based on public sector comparators. In the USA, the postmaster general’s pay (the CEO) is tied to the Federal civil service pay system. It again depends on what government wants from its postal business. A dynamic, competitive, progressive business has a set of management job specifications different to those of a government department. An effective board ensures proper management remuneration. Another concern raised in this review is the remuneration level for Board members. The remuneration of non-executive directors can also be market based. But in the end it must have shareholder approval, so for example should the Post Office become a formal company, it would still have Board remuneration approved at the very least by the shareholding Ministers.

In conclusion, one of the governance issues that does require resolution will be the ongoing treatment of conditions of employment for the Post Office. What over-arching conditions, if any, should apply. Recommendations will be made when a governance framework is proposed later.

5.3.4 Preferred Supplier to Government A further issue that has been raised concerns the commercial relationship with government. As well as a normal relationship for mail delivery, the Post also acts as an agent for government in post offices. Social welfare payments, motor registrations and other services can be transacted at post offices. Here the Post Office acts as an intermediary, providing the system link between the counter transaction and the various government systems. There is a sense that the Post Office could do more for government departments and there appears to be a general willingness to explore this further.

In this context, the question has been raised as to whether the relationship as an outsource provider would change if the Statutory Board status of the Post Office was to change. This also is a common issue in the global postal community and there are two issues at play. Firstly, acknowledging that the post office network is a community good that does not pay its way on its own account, adding business volumes and transactions helps make the agency post office more valuable for the private sector store owner, and thus makes the entire network more sustainable. Taking this view, it should be a matter of government policy to support the post office network if the option exists.

Confidential 28 | P a g e Secondly, the interaction between government services to be provided at postal counters and the Post Office as host has to have a sensible economic footing. It has to make sense for the government departments involved, and it has to be commercially attractive for the Post Office. This does suggest a competitive model. The Post Office should be considered a natural outsource partner, if it has the skills and resources needed, but those services should be provided on an economic basis. That would involve a formal tendering process. However, such a process would not necessarily exclude the Post Office from participating in trials and evaluation criteria should include consideration of the cross-subsidy that occurs to maintain the post office network. 6 FIT FOR PURPOSE

The review has now canvassed the range of policy and business issues for the Isle of Man Post Office. Before recommending a specific governance structure we need to return to look at the question of whether the existing arrangements are fit for purpose.

We have seen that the Post Office has a range of community expectations as far as services on the island are concerned and these are supervised by a mixture of internal debate within the Post Office, references to Ministerial opinion, and specific departmental direction. Also poorly defined are the boundaries of the business. At one end of the spectrum the sense is to keep carrying on doing what the business has been doing, evolving quietly as markets and opportunities change. At the other end is a sense of impatience, of believing the business needs to change and frustration at the inability to invest in its diversification.

Success in government terms appears to be defined as keeping the ongoing dividend contribution to the Isle of Man budget, while at the same time ensuring basic delivery and counter services are sustained. To achieve this there is a sense that the Post Office still has opportunities to pursue lower costs. If this view prevails strongly amongst Ministers, it would suggest a lack of trust in the Post Office’s ability to prioritise its strategies. The Post Office in turn feels its case for growth is not being listened to or is being actively frustrated by political interference or by attitudes concerned about the impact its growth might have on the private sector.

Let us first review the processes that involve the development and then approval of the Post Office’s strategic plan. Management prepares the basic structure, marshalling arguments, discussing intent and direction with the Board. Feedback may come in the form of Board advice and perhaps even from the two key departments, Treasury and Economic Development. The plan is presented formally to the board for approval.

The process within management is reasonably clear. Management may debate aspects but at the end of the day the CEO needs to decide what goes forward to the Board. Because in the case of the Post Office the four top managers also attend the Board meeting there is an opportunity for the board to question each of the disciplines.

The process within the Board, like all boards, may take various forms. Issues may be debated and agreed by consensus. Or, if there are contentious issues, the Board may also vote on the plan. What drives board member decision-making? The strength of any governance board is the quality of this decision-making. It is not postal expert views that are necessarily in requirement. It is common sense, a sense of risk, clarity of objectives and conviction of argument. It must also avoid the potential for conflict of interest. Confidential 29 | P a g e Some of the people spoken to felt that the presence of two political members on Statutory Boards was by definition a conflict of interest. Let us take a hypothetical example. The Post Office for sound business reasons feels that a particular post office has become surplus to the needs of the overall business. This office happens to be in a political Board member’s constituency and an election is due. Is there likely to be a conflict of interest? Or, by having a political member so close to a major community issue, sound and early advice can be given that closure would be a public relations mistake? This is not making a judgement about the actual sentiment of the individual involved, but the perception about that judgement.

Fit for purpose therefore has to encompass a number of things. The purpose of the Post has to be made clear by government. Expectations about business performance, future performance, delivery of social obligations have to be explicit. Where there is an argument to change expectations there must be clarity in the process for making the case. It may not be the Post’s job to define these expectations but it must make clear the implications of social policies.

Fit for purpose also has to consider the future, that is to say how the postal business might need to evolve to continue to deliver its mandate and to assess future risks and opportunities. This level of analysis has to be done in an impartial but professional manner. The competence with which this is carried out is a feature of good governance. Options have to be tabled and debated at Board level. The shareholder, government in this case, has to then form a view about the business’s strategic plans. This view is formed by its own analysis. Where issues are raised that ask for change in the social obligations then these need to be debated at the level decide by Tynwald, but beyond any single individual.

Confidential 30 | P a g e 7 CASE STUDIES

Detailed interviews were held with stakeholders in both Jersey and Guernsey. The outcomes and ideas of interest are summarised below. There are learnings to be had from the situation in the Channel Islands but it is understood that the circumstances in the Isle of Man are different. For one thing, the Isle of Man Post Office has consistently performed well and is at present more profitable than either Jersey Post or Guernsey Post. In those jurisdictions, removal of the LVCR forced changes on the businesses, including reducing the days of service per week to five, and major cost reduction programmes with sizable redundancies.

Confidential 31 | P a g e 8 CONCLUSIONS

8.1 International Experience It is well-known in the Isle of Man government that most postal businesses in developed economies have been structured into companies, operating under company law, and with business-oriented non-executive directors. This is the case in the benchmark States of Jersey and States of Guernsey. As a Statutory Board the Isle of Man Post Office is not as fully commercialised as if it were a company.

The main argument for incorporation is to distance government from the commercial activities of the Post. The role of government in the case of Post is twofold. It is to determine the set of social or community obligations required from the postal operator and it is to act as a shareholder which has a significant investment in the assets and business of the Post.

In deciding to give state-owned enterprises company status, governments took the view that a civil service structure could not provide the agility and business focus that was being demanded. It would be fair to say that often there was not even clarity in how the Post might evolve as a business, or even whether it would survive. There was a sentiment in government that postal organisations had become inefficient, bloated, and irresponsive. This is not to suggest such problems with the Post Office, as it has also evolved in line with other peer group postal businesses.

This review will recommend that a decision be taken to make the Isle of Man Post Office a company under company law. At the end of the day this is based on first hand personal experience of working in that governance environment, at one further step removed from government involvement in day to day commercial affairs.

The tangible benefits to the Isle of Man economy of such a move will derive from an ongoing productivity focus on the core postal business and the ability to protect and further develop the commercial export business. While the Post Office is not a civil service organisation and has notional separation from civil service employment conditions, it runs the legacy risk of preserving a civil service culture. There have been times when the Post Office believed it had commercial justification to act differently to what was being mandated by government but could not do so.

While this in itself does not by any means suggest business failure, the consensus in peer postal companies is that it slows or inhibits more commercial behaviours that better fit the needs and demands of government.

Confidential 32 | P a g e 8.2 Nature of the Postal Business Modern postal businesses are all facing the erosion of letter mail, growth in parcel deliveries, and unless they have a strong financial services component, a decline in post office functionality. The business responses are twofold: an ongoing search for better productivity in core mails activity and expansion of service offers by diversification. Better productivity can be obtained by managing labour costs, prices, service standards, and universal service obligations. Diversification can be along the existing value chain of services, mail production for example or wider parcel delivery options, or into new areas of business, such as logistics and warehousing, or new geographies.

The Isle of Man Post Office faces the same issues. These are gradual, to the extent that 5 – 10 % mail volume decline can be called gradual, with a competitive on-Island parcel delivery market. The fundamental difference is that it also has a solid but precarious export market. It is solid because it is profitable and sizable. It is precarious because it is highly competitive and international customers are able to remove (or add) business easily and without much warning. In these aspects, the Isle of Man Post Office shares a common business structure with its peers in Jersey and Guernsey.

Of significant importance is that the Post Office is profitable today. Segmenting its business base into the core island postal business and its export commercial business, the former is more or less at break-even. The costs of providing the six-day universal service, the network of sub-post offices, and philatelic business are just covered by revenues. This is the traditional postal activity. Its profitability can only be increased by reducing costs faster than volume falls, a difficult proposition for a postal company with a large fixed cost element in its delivery and post office networks, or by increasing prices significantly, or by changing the universal service expectation.

The profits generated by the Post Office, which form the basis of its shareholder dividend potential, is its commercial export business.

This review has not been charged with reviewing or commenting on Post Office business strategies or its business structure. It is, however, relevant to note that for its part, the Post Office feels it can maintain this balance and does not indicate any immediate need to change how it provides Island postal services. The proviso is that it needs agility and commercial responsiveness to protect and grow its export business. At the heart of the issue is whether it can continue to do so with the current governance structure.

The Council of Ministers has not been persuaded in recent times that a strong enough case has been made to warrant change from the existing situation.

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8.3 Options for Change Postal structures have evolved through the following sequence of stages:

1. Government department with civil service ethos and employment conditions.

2. Regulated national institution separated from the civil service but not wholly commercialised, either in terms of business scope, governance, or monopoly status.

3. State-owned company operating under company law but with service obligations mandated by government and varying degrees of regulation and market openness.

4. Private company, with governments holding a percentage of or no shares, and again with varying degrees of regulation and market openness.

The direction of travel has been universally the same, towards commercialisation (and today we can add privatisation). There has probably only been one reversal of direction, a failed privatisation of the Argentine Post in the 1990s. The Isle of Man Post Office sits at the second stage in this list.

It should also be noted that moving a postal entity from one stage to another does not imply the need for ongoing movement. That is to say, the creation of a commercial company does not imply the next step of privatisation, even though corporatisation is a necessary stage to pass through. The earliest postal companies, New Zealand and Sweden for example, remain government owned with no aspect of privatisation on the government agenda.

This review doesn’t wish to use the language of options in the sense of either/or binary decisions, with dramatic outcomes one way or another. Given that this review has been asked to recommend a governance structure, the only logical option for change would be to make the Post Office a company. 8.3.1 Keep Statutory Board Status This option keeps the Statutory Board structure as it is, along with the departmental oversight from both Treasury and Economic Development. It is obviously the easiest path to follow and has the least disruption. In a way it is also the easiest to recommend because it avoids perhaps awkward political choices.

The main advantage of not changing the status of the Post Office is that it does not require any immediate action. Its business balance will evolve gradually as it needs to. This may include developing new services for government at post office counters as currently contemplated. The ability to continue along the same level of profitability will be more challenging but not impossible. Cost pressures might challenge the current service levels (six days, maintaining the same number of post offices, wages growth) but at each step Treasury can review its expectations for dividends in the light of community and social obligations.

Confidential 34 | P a g e The disadvantages of not changing are several. The Post Office remains caught in the cycle of government budgeting, both for capital expenditure and job numbers. For a recognised commercial trading business, it makes no sense to contain the size of the organisation if there are growth opportunities within its scope of business remit. “Small Government” as an objective of Tynwald should not apply to the Post.

Similarly, if the Post can establish areas for capital investment, whether in technology to help productivity or in new business areas, it should be able to do so based on its own capital needs. These shouldn't have to be in competition with ordinary departmental capital budgets.

Perhaps more importantly than anything else, the path to transforming the postal culture to one appropriate to its business environment, namely customer service, business growth, and competitive markets, will be impaired. This is the universal conclusion by postal managers who have experienced the transition. In the cases of Jersey and Guernsey there is no interest in turning back, away from company status. In both Islands, stakeholders recognise that the Posts are more customer focused and quicker acting organisations. Employees and customers both have left behind the old civil service culture.

8.3.2 Create a State-Owned Company The second option is to formalise the Post Office under a company structure, to operate under island Company Law and following the Isle of Man Codes of Corporate Governance. The term “corporatisation” in this review is used to be synonymous with this definition.

This is the preferred option of a majority of non-executive members of the Post Office Statutory Board and of management. It is not a view shared by the political members of the board, namely the Chairman and (possibly) the Vice-Chairman.

It is the recommendation of this review to create a postal company.

In making the argument for corporatisation it is important to distinguish between issues of principle and issues of competence. As has been stated before, a governance structure on its own cannot eliminate risk and cannot eliminate human failures. In many discussions held for this review examples were raised about uncertainties in Post Office decisions, actions, and plans. For example, it is one thing to say the Post Office should not make private sector acquisitions because of the impact on competition on the Island. That is a matter of principle, of unambiguous government policy. However, to say that the Post Office should not proceed because of the lack of management skills in a new business area is a matter of competence. A Board of a company may reach this decision as equally as the Board of a statutory trading business.

Confidential 35 | P a g e The case for company status is about preparing earlier rather later for the future evolution of the business. It is not essential. The Post will not collapse in the near future if it doesn’t change. But it is best practice. It is the situation in developed economies. The reason postal organisations have changed this way is because governments have wanted their postal businesses managed as a business. They want easy decisions to be made quickly, and hard decisions to be made in the interests of the business in the first instance. They wanted to clearly delineate between government responsibility for social policies – how the universal service obligations are defined for example – and accountability for postal operations, a matter for the company board and management.

This sounds like a rather soft option and soft argument. The reverse is the case. Full accountability makes the management and the board own collectively decisions they take. There is no standing back, deferring responsibility to government officials or Ministers. The accountability is both to the plans they make and have approved by shareholders and to the obligations mandated by government social policies.

The other benefit of changing the postal governance structure in this way is that it requires greater clarity from government about the purpose it has for the postal business. This does require debate and effort, but by articulating expectations there are fewer grey areas that might waste management, board, and government time in other circumstances. The business might expend time and resources to develop a business case for a new activity and find it runs into shareholder opposition later than optimal. If it knows where the boundaries are, then it is more efficient in how it spends business development resources.

The reverse is not true. Under Statutory Board status at present this political opposition to a business case may occur at a number of stages: at Board, Departmental, or Ministerial levels. This opposition may manifest itself as the interpretation by individuals of government policy, with it being conceivable that different outcomes might be achieved under the company structure. So, it becomes possible that ideas are stifled at too early a stage or even simply by changes in individuals at the various policy levels. Minister A may hold different views to Minister B.

The disadvantage to reform of the governance structure is that it will require effort. There will be a transition period where uncertainties about jobs and roles may occur. Changes will probably be needed to the Postal Act and the expectations of government having both shareholder and public policy responsibilities will need to be documented. This should take the form of a Memorandum of Understanding. A consequential impact will also be whether the case for change should apply equally to other Statutory Boards. This question is outside the scope of this review and for that reason should not be used as an argument to prevent change.

Fortunately, there are plenty of models upon which to base the transition plan and the Post Office itself has done much of the legwork.

These procedural matters can be resolved relatively easily. But at the end of the day the main disadvantage to structural reform of Post Office governance will be the uncertainty the impact of change has on the Post Office itself. A number of people have expressed concerns about what a postal company might do once ‘liberated’.

Confidential 36 | P a g e 8.4 Risks of Corporatisation In creating a company, it is assumed that existing company law and governance codes will apply directly to the new entity, called here for ease of reference the Isle of Man Post (IOMP). The law will require that a board of directors be formed and that the board will have all fiduciary responsibilities for the company. Specific shareholder or shareholders will need to be named. Overseas experience indicates this may be the equivalent of a Treasury Minister or shared between two Ministers, each representing a government stakeholder interest.

Before making recommendation about this, interested parties have raised a number of risks that may occur by making the Post a company.

In principle, the governance structure is designed to manage risks. Failure can occur in any number of ways, but this has more to do with vigilance and process than it has to do with failings of the governance structure itself. Ambitious or strong individuals can disguise behaviours and actions. This may happen at any level. The effort that goes into monitoring entities is commensurate with perceptions of risk.

The postal business by nature is not a high risk one. The core business is well understood and expansions and investments have to be managed through competent business case and strategic arguments. Along with restraints provided by shareholders and by government mandates, the necessary controls can be instituted with a high sense of confidence. In fact, the hardest part is to avoid imposing too tight controls on the business so that it is unable to achieve any of the commercial goals it has been established to do. If that turns out to be seen as necessary, it may as well return to government department status.

The first order of risk concerns the new company interfering with or using any dominant position to affect the private sector economy. Ordinarily, institutions such as the Office of Fair Trading will intervene if that is the case, and indeed that has happened for the Post Office. In other words, as a company, the Post should have its commercial behaviour regulated as would any large or dominant business.

Whether the shareholder wishes to see the Post invest in new ways that might affect the private sector is a matter of policy. This is not about large or small government. It is a principle. Assuming that the OFT approves a growth activity for the Post that might involve, for example, a private sector acquisition on Island, will the government be happy with that? Rather than tying down options and business opportunities, the way this risk is handled is to include a covenant in the MOU that would require this sort of diversification to be approved by the shareholder, either via an annual Strategic or Business Plan, or as new proposal. Business diversification in general can be handled this way.

A second area of risk is that the new Post believes it is necessary to change core postal operations. Usually these ideas emerge through budget and cost cutting reviews. Governments are typically worried about declines in service standards, pressure to reduce days per week mail is delivered, and reductions in size of the post office network. Again, these are the typical social obligations and they can be protected, again by including the requirements in the MOU.

Confidential 37 | P a g e It should be noted that this review recommends that the shareholder and government operating and investment conditions are stipulated in a detailed MOU. It is strongly urged that they not be incorporated in postal law. Flexibility and agility will be needed from time to time and that simply cannot be achieved by cementing today’s expectations in law.

Another major risk area concerns employment conditions, for managers, employees, and directors. Non-executive director remuneration is dictated by the shareholder and so will not be an issue. To the extent that senior managers are also members of the Board (for example the CEO) then the company’s remuneration policies for such directors might also be approved by the shareholder. In any event, the corporate governance code will require a Board Remuneration Committee to decide top management pay and conditions, and will be responsible to the shareholder in reporting remuneration levels.

It would probably be fair to say that over time, executive director level remuneration has increased under the company structure. However, this occurs only when a properly motivated board finds remuneration to be an important incentive in keeping or recruiting managers. There would be little chance of a remuneration review concluding that postal managers should be paid at the upper percentiles when making market comparisons. While these changes are aimed at trying to make the Post more entrepreneurial, the nature of the business, its domestic monopoly status, and scale would find it hard to recommend ‘excessive’ salaries.

Correspondingly, the pay and conditions of the workforce raises the potential for political concern should the Post decide its cost structures can no longer be supported. Because of pension conditions and the civil service heritage, pay for postal workers is typically a good deal higher than the private sector. This means that achieving comparable levels of unit cost levels with private competitors will require much higher levels of productivity. This can sometimes be achieved through economies of scale and scope, or though technology investment. But it does remain a major postal issue world-wide.

In both Jersey and Guernsey major steps have had to have been taken to bring down labour costs. This was because of the huge impact of the LVCR change and the threat that posed to the viability of those businesses. In the Isle of Man Post Office, the reverse seems to have happened in that the Post had not been able to reward its workforce in good years because of the need for civil service budget restraints. Nevertheless, some stakeholders feel the Post Office labour costs require review. And any proposed change will have significant political impact.

It is not a function of this review to assess whether labour costs are too high or not. The principle of interest is how the debate about those costs might emerge differently were the Post Office a company. In discussions away from the Isle of Man this example is used precisely as one of the tangible benefits or corporatisation. In benchmarking the business performance of its company, a board must look at these questions impartially, and reach a conclusion. If and whether any changes are implemented can be handled via prior agreements established in the MOU.

This leads to the final risk area for government if the Post Office is one step further removed from direct control. Because the Post Office is in the public eye and because its social obligations are viewed as important to the community, business decisions that would be ordinary in the private sector can become highly politically charged. A good example might be the recent events concerning conversion of the Ramsey Post Office to an agency.

Confidential 38 | P a g e In both Jersey and Guernsey this is handled by a “no surprises” clause in their MOUs with government. This is expressly meant to say that the shareholder must be alerted about matters that the company might be dealing with that could have a potential political impact.

It is important to stress that this is not about the government making decisions about what the Post might or might not do. That has to left to the Board. However, it does allow the shareholder to look at those sorts of matters in the context of the agreements it has with the company. It also allows the shareholder to consider the government’s own response, and in extreme case, the shareholder could receive a direction from parliament to require the company to change its proposed action.

This introduces the role of the shareholder in this section on managing risk. The shareholder also has obligations. The shareholder must ensure open communications channels exist between the designated officers and the Post. It must be diligent in reviewing plans and in setting performance expectations. It has to be satisfied that the company, the Post, is complying with the terms of the MOU.

In summary, good governance is about clear expectations and clear expressions of intent, as in a Business Plan for example. A company structure with a good MOU will ensure proper management of risk. And good communications between company and government will preserve the integrity of both sides.

Confidential 39 | P a g e 9 GOVERNANCE FRAMEWORK

This review recommends that the Isle of Man Post Office be established as a limited liability company operating under company law and regulated by competition law as would be any similar sized Isle of Man company.

Because of the nature of the postal business and its place in the Island economy the Post Office has both commercial and social objectives. Any governance structure must take this into account. This will require a hierarchy of decisions and principles to be established to capture the issues, risks, and concerns of the public and of the government. This decision- making properly begins in Tynwald and flows down and this is how the recommendations are organised. In practical terms, the authorised departments will need to agree under the direction of the Council of Ministers the proposals to be then brought forward to Council and then to Tynwald.

It is recommended that the Isle of Man Post Office be created as a company owned by the Government of the Isle of Man and established under Isle of Man company law.

9.1 Tynwald and Council Tynwald is responsible for setting its expectations for the Post. It may choose to then delegate this to Council or to Ministers. The following recommendations remain relevant even if Tynwald decides to NOT proceed with a corporate structure. This is because the strength and propriety of how Post is supervised remains relevant whether it remains a Statutory Board or becomes a company. There are several decisions required:

 Determine the economic and social expectations of the Post

 Determine the Shareholder structure

 Determine the reviewing accountability for ongoing postal activity.

The Council of Ministers is the first port of call for issues elevated above shareholder level. It has to review and decide the recommendations of this review, and then decide ongoing matters. There should be no need to change the role of the Council should the Post Office become a company or remain as a Statutory Board.

9.1.1 Purpose of the Post Being clear in what is to be expected of the Post is the first step of proper governance.

It is recommended that the purpose, aims and objectives of the Post be documented in an MOU approved by Tynwald.

Confidential 40 | P a g e It is recommended that Treasury and Economic Development together draft a proposed MOU.

These recommendations should be implemented irrespective of the decision about company status for the Post Office.

A template has not been offered in this review but can be a next step. Recent reviews of the postal MOUs in Jersey and Guernsey should provide adequate pointers. They stipulate where the Post can or cannot operate. They set commercial expectations and set the universal social obligations. They determine the process for reviewing any of these. They insist on ‘no surprises’ for government and offer communications processes. They also stipulate the accountabilities of the Board and how it is to be formed.

The MOU also sets in place an annual strategic and business planning process, annual budgets, and annual reporting. The Post is required to indicate in adequate terms its intentions and aims for the coming financial period, and to have this approved by the shareholder.

This offers protections for government should the Post wish to invest or diversify into new areas. It must have government clarity about expectations and constraints. Similarly, initiatives that might affect social obligations will require approval. The case has been made here that the postal environment is in a state of dynamic change. For this reason, it is better to document government expectations in the contractual form of an MOU, as opposed to cementing in legislation. The Postal Act and how it may need to be amended should be concerned with high level principles and not the detail of today’s universal service obligations.

9.1.2 Shareholder Structure As a company, the board will be accountable to its shareholders. It is an asset of government, but not a departmental entity. In most circumstances the shareholder is nominated as the Treasury Minister because the whole purpose of setting it up as a company is in recognition of its commercial contribution. This is also the most efficient way of exercising shareholder responsibilities. A second option is to broaden accountability by including for example the Minister of Economic Development as an equal shareholder. The disadvantage is the extra complexity. The advantage is that the second shareholder should be a Minister charged by Tynwald to have responsibility for social and community concerns of citizens. In this format, issues that the Post may wish to address that may have an impact on the broader community need not be confined to the thinking of one individual. If the two Minsters cannot agree, by definition the matter must be brought at least to Council. This ensures a proper level of debate.

Jersey and Guernsey both have assigned shareholder responsibility solely to Treasury. This works because their respective MOUs make it quite clear what is expected of the Post and it becomes the Treasury responsibility to assess, evaluate, and where necessary elevate issues to Council. In the interests of efficiency and in recognising the commercial objectives of a postal company:

It is recommended that the Shareholder is the Treasury Minister.

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9.1.3 Shareholder Supervision One of the outcomes of recent reviews in Jersey and Guernsey is that the shareholder role must be effective. In this context, effective means both as an owner of commercial assets and as a guardian of the social objectives decided by Tynwald. And it also means being politically effective, in understanding when matters come up that will have a political consequence. To do this supervision well requires both periodic attention tied to the annual planning and reporting processes and to day to day communications for the many issues that arise in the course of ordinary business.

This requires some expertise and dedicated resource in the designated shareholder department, namely Treasury in the present recommendation. It also requires goodwill and understanding on both sides. It is important to distinguish here between a “no surprises” policy and the responsibility of the Board of the Post Office to make decisions and be accountable for them. Under a company structure, the board of directors must make decisions for the benefit of the company. They cannot make decisions for the benefit of politicians.

This does not mean, however, that political considerations are not taken into account. To use an example, suppose hypothetically that the Post Office wished to narrow the post office network to fewer outlets. One can understand the business drivers. However, if the board felt that this would have an adverse impact on the postal brand because of public outcry (outcry that elected politicians would feel at first hand) then it may well decide not to proceed. This is not political decision-making; it is business decision-making. In the context of the point being made here, the idea of changing the post office network will have been discussed with the shareholder or with his or her representatives before even any board decision.

It is recommended that a shareholder executive based in Treasury is appointed as the departmental liaison officer with the Post company.

9.2 Post Office and Board Structure Possibly the more contentious issue arising from this review is the impact corporatisation will have on the Board of Directors. This is because it will touch on individuals who may or may not share the recommendations being made.

Under the current Statutory Board structure political and community concerns are vested in the two political appointments on the Board, the chair and vice-chair. It is clear that this does add some efficiencies in decision-making. Proposals brought to the Board that might affect or cross boundaries of government policy can be halted at early stage. For example, if there is a clear Tynwald policy that State entities cannot enter into private sector activities by acquisition, then the political chairman can at one level act as the government supervisor, and on another level be efficient in conveying proposals to the appropriate political levels.

Confidential 42 | P a g e The concern, expressed universally and without hesitation in both Guernsey and Jersey, and everywhere in the reviewer’s experience, is that an elected politician on a board of a state-owned commercial business cannot avoid being conflicted. An elected politician in this situation has a twofold duty: to consider his or her electorate, and to act in the best interests of the company. These conflicts do not sit comfortably in any corporate governance code. Just as a person would not be appointed to a board from a competing business, it cannot be expected that elected members of government can equally be impartial.

This is not about integrity or competence. Even the best skilled individual, who is able to segment his or her interests, will still be subject to public perceptions of conflict.

A further argument against elected board members is the potential impact on continuity, and this is particularly pertinent if the appointment is also the chair. Because of the electoral cycle, board appointments are less secure and tend to be shorter. Further, at 2 ½ years, the chair appointment term is too short. This means the potential for too frequent change and means board selection cannot be completely orientated towards the needs of the company.

Board appointment processes, except for the chairman, appear to be well run in the Isle of Man. The corporate governance code outlines processes for board appointments. It requires a Nominations or Appointments Committee, and should be a function of the board itself. The involvement of government in board appointment processes will depend on choices in the MOU. It would be appropriate for the shareholder to select the chairman, approve appointments, and approve director remuneration. Commercial and industry skills should be sought to ensure a balanced, commercial board that is able to guide management and strategy.

The size of the board can also be determined by the MOU. The current level of five non-executive board members is about right. Board appointments should be for a set period, for example a 3 or 4-year mandate, but the board should not be completely renewed at each period. It should be possible for directors to have their terms extended so that a process of rolling appointments can be established.

Consideration should also be given to appointing executives formally to the board. It is usual to have the CEO, and possibly the Finance Director, as board members. This can be a decision by the newly formed board itself and might even be determined based on the skills and experience of executives. By having the CEO and possibly other managers as part of the board ensures ownership of board decisions. Managers cannot stand back and say they are not accountable for those decisions. Again, as members of the Board, their remuneration will have to be approved by shareholders, so this addresses another area of concern for government.

It is recommended that a non-political board is established to operate within the ambit of the corporate governance code, with a chairman appointed by the shareholder, and including on the board, in principle, the CEO.

Confidential 43 | P a g e 10 TRANSITION

The transition from Statutory Board to Company status will require time and leadership from the Council of Ministers. The approval process for this, the establishment of the MOU, and the decisions about board members will take some time.

The end of the Post Office financial year is in April 2016 and there is an election for Tynwald in September 2016, six months’ later. Tynwald should take the decision to convert the Post Office to company status as soon as possible, but allowing for implementation in time for the new financial year. This will be somewhat fast paced but will allow time for confirmation of existing and new non-executive directors to take over responsibility well before the election.

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