The DTI and Post Office Limited Working Capital Loan Facility
The DTI has made available to Post Office Limited ("POL" - the network subsidiary of Royal Mail Group plc) a tightly drawn revolving loan facility of up to £1.15 billion net in order for POL to be able to meet some of its working capital requirements (primarily to ensure there is sufficient cash in post office branches to meet the benefit payment and other cash needs). The loan package was agreed against the background of the Department of Work and Pensions ("DWP") migration of benefits payments to a system of direct payment of benefit into recipients' accounts.
Unlike a bank, which funds its cash requirements from client funds, POL has no client funds of its own (i.e. the funds that pass through its hands belong to an end client - e.g. a bank or a Government Department). POL's cash requirement has previously been pre-funded by DWP through the benefits contract, but this pre-funding will decline and come to and end with the DWP migration to direct payment. POL however still needs to have the cash available to meet the Government commitment of benefits recipients still being able to collect their benefits in cash over the post office counter.
Much of the loan funding is short term, to help cater for seasonal and other peaks (such as Christmas and Easter when post offices pay out two weeks benefit together). It is expected that the borrowing requirement on this facility will eventually reduce over time, as the demand for cash at post offices declines and POL gains experience in operating and managing its cash flow needs under new arrangement of direct payment.
The loan facility has been in operation since December 2003 and it matures on the 31st March 2010, by when any remaining outstanding loans will have been repaid. It is based on quasi-commercial terms and the lending is secured against assets of the business. The facility has also been subject to and received European state aids clearance.