Sajid Javid overrules Martin Donnelly on Royal Mail shares

BIS perm sec Martin Donnelly requests rare "letter of direction" from minister Sajid Javid after raising value-for-money concerns over plan to gift extra shares to Royal Mail staff

By matt.foster

17 Jun 2015

Business secretary Sajid Javid has overruled a warning from his most senior official that part of the government's plans for the sell-off of the Royal Mail do not represent a good deal for the taxpayer.

Last week, ministers announced that the government had sold half of its remaining 30% stake in Royal Mail, with the firm's employees handed an extra 1% of shares in the company on top of the 10% they received in 2013. Chancellor George Osborne said the extra shares for staff – worth £50m in total – represented a "special bonus for the workforce who have done such a great job turning Royal Mail around".

However, Martin Donnelly – permanent secretary at the Department for Business, Innovation and Skills – has taken the rare step of seeking a "letter of direction" from Javid over the policy after questioning whether it represented value for money. 

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"The Royal Mail is a key part of the UK's infrastructure," Donnelly wrote. "Its efficient operation is critical to the economy and that, in turn, requires the full engagement of its workforce including through necessary restructuring for the company to remain competitive. I have considered whether it is possible to construct a business case that the impact of the employee shareholdings on the company's performance justifies the taxpayer's expenditure involved. I am not aware of sufficient evidence to reach that conclusion.

"Against this basis, I conclude that while a decision to allocate more shares to Royal Mail staff up to a limit of a further 1% and on the same terms as previously is an entirely legitimate policy decision, it does not provide a tangible return to the taxpayer and so is not value for money as defined in the legislation.

"I recognise you may wish to take a broader view. If that is your decision, I will proceed accordingly but I require your written instruction to do so. I will then ensure the necessary steps are taken to carry forward your instruction without delay."

As accounting officers for their departments, permanent secretaries have a duty to ensure that spending decisions meet four key tests – "regularity", "propriety", "value for money", and "feasibility".

If a permanent secretary believes a policy decision may contradict one of these aims, they must write to a minister asking for a formal "direction to proceed" – essentially asking the minister to order them to continue regardless. The exchange of correspondence is then sent on to the National Audit Office and Public Accounts Committee spending watchdogs and published online through GOV.UK.

Responding to Donnelly's letter, the business secretary wrote: "This is to confirm that I am formally directing you as Accounting Officer to implement the gifting of up to one percent of Royal Mail shares to its UK employees.

"I have noted your concerns about the value for money of doing so. However, in coming to this decision I have taken into account the wider benefits of this policy. Employees currently comprise an important part of Royal Mail's shareholder base. As you note in your letter, this principle of employee participation was enshrined in the Postal Services Act 2011. Further I believe there is merit in rewarding the employees of Royal Mail for their hard work, which has contributed to the recent performance of the company and has been reflected in the current share price."

Research published by the Institute for Government think tank last year found that the use of ministerial directions is rare, with just 50 sought between 1990 and 2013. According to the Institute, which analysed Treasury figures, almost three-quarters of the directions issued by ministers came after concerns were raised over the value for money of spending plans.

It took almost five years for the first ministerial direction to be sought in the last parliament. The first such exchange came in February this year, when transport secretary Patrick McLoughlin overruled his permanent secretary Philip Rutman over plans to require companies bidding to run the Northern and TransPennine Express rail franchises to scrap "Pacer" trains by 2020.

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