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Present: COMPEC Also Attending
Tim Brown Bob Peaple (Friday only) I project
Richard Dykes Paul Rich (Friday only) I controllers
Danny McDonough Dick Wheelhouse (Monday only)
Roger Tabor (chair) Representatives from Charterhouse (item 2
~ Friday only)
David Taylor
1 Introduction
1.1 Roger Tabor welcomed members of Charterhouse.
1.2 He outlined the purpose of the meeting; to agree the business case for :
BA/POCL and to discuss issues and approach to be adopted at the forthcoming”
meetings with MaPEC and the Board. Q
13 The submission sought MaPEC authority for POCL, in conjunction with the
Benefits Agency (BA), to proceed to the contract award stage of the counter
automation project. The project includes the full automation of all counter
positions in all post offices and the new card-based benefit encashment service.
2 Valuation of POCL
assess POCL’s likely future market valuation, with and without the automat
platform proposed in the business case.
22 ‘The approach used was from a market perspective or as if POCL were about to
be floated. An analysis of quantitative and qualitative issues was delivered,
against a background of Counters existing mission statement. Key issues likely
to influence the market, were outlined, in particular:
® recognised strengths and weaknesses
e financial record
® cost projections
© likely market perception of prospects for growth on existing and potential
new business
@ market comparator analysis
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Different methodologies gave different values and the presentation reached its
conclusion on the basis of the whole exercise. Charterhouse’s estimate of the
value of POCL, assuming automation, lay in the range £285m to £310m,
although pessimistic and optimistic sensitivities extended this range by some
£120m at either end. Without automation the derating of this assessment by the
market would reduce the value of POCL by £265m-£350m, effectively
indicating that the hypothetical flotation could only oe viable with automation
and related growth prospects in place
The Committee noted that the Charterhouse conclusions supported the
assumption on the base case that not proceeding with Automation would
seriously worsen POCL’s future business viability.
Members asked Charterhouse to explain how the various value reduction
assumptions (which gave rise to the difference in value between the automated
and non-automated environment) related to net present value details in the
business case. The business case NPV did not reflect market value increases,
only changes in cash flows. Charterhouse undertook to take this away for
consideration.
Business Case
COMPEC reviewed the business case and supporting information and noted
that:
¢ In line with business practices, options were compared using NPVs
discounted at 12%. As the proposal did not involve upfront investment by
POCL but created changes in the income streams and running costs of the
business, the effect on P&L projections would be of at least equivalent
importance.
® The highest NPV would come from a hypothetical public procurement
option, but this was not feasible because the Benefits Agency would not
agree to it and their parallel involvement was crucial. Furthermore it was
unclear whether the capital outlay of £140m could be afforded by the Post
Office. The whole project had been constructed on the presumption that it
would be done under the Private Finance Initiative - a Government
requirement - and the decision would be made on that basis.
© Of the PEI options, which were feasible, the most attractive option was the
supplier “Dick”. ‘Dick’ had the best NPV but also accepted greater
accountability for fraud and associated risks. Although that option was
technically less secure than ‘Tom’. it was commercially the only acceptable
one on the evidence before the Committee. The business case figures were
based on ‘Dick’. It was likely that the failure of ‘Tom’ and ‘Harry’ to
accept any fraud risk and to put the onus of proof on to the Post Office,
would rule them out from being acceptable PFis. ‘Tom’ might be classed as
a finance lease, requiring some £380m to be created in POCL’s balance
sheet.
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©. The positive NPVs in the business case depended on the avoidance of
unacceptable tosses of business opporiunities and price erosion deriving
respectively from marketing opportunities opened up by automation, and the
associated long term agreement with BA, which included pricing principles
and some protection against volume losses. in incremental terms, the use of
automation would add to operating costs, because subpostmasters were not
paid for back-office time which automation woulc save, and cash
accounting savings were not proper to this case, because they also required
the TIP project to release them. In the same vein, manpower savings were
not fundamental to the case. It was crucial therefore that the base case was
fair and reasonable and to that end Coopers and Lybrand had been
commissioned to validate the details and had expressed themselves content
that the assumptions were reasonable and consistent.
« While POCLs latest Business Plan had already factored in the main
assumptions about automation costs and benefits, a deterioration from those
profit projections of up to £12m ina single year was implied by the project,
following a receipt of tenders, with supplier prices above earlier indicative
levels.
« The numbers in the paper had been expressed net of the outstanding SSA.
(Northern ireland) negotiations (which, if successful represented an income
upside)
« The paper recognised various ‘risks’ relating to costs outside the contracts
implied under each option. The risks had been attributed values within the
case and did not differentiate between options, except that the (infeasible)
non-PFi option’s financial advantage was severely eroded by taking fraud
risk otherwise left to the suppliers.
© The non-financial value factors indicated that all three suppliers exceeded
the acceptable hurdle.
3.2 On the basis that:
© the project had a positive NPV of £65m (‘Dick’) relative to the base case
® the project would not worsen Business Plan projections outside manageable
bounds (maximum single year effect £12m)
° the project would secure strategic value and create net worth for POCL
‘© automation was a key enabler for new business development in the Business
Plan
© POCL would be transformed into an automated business at the end of the
contract period without significant investment outlay
® the associated long term contract with the Benefits Agency would help
POCL to secure the nation-wide network of post offices and de-risk a
substantial element of the Business Plan
® project management and fraud risks would be substantially transferred to the
supplier
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* only a PFT option would be acceptable to Government and the Benefits
Agency
COMPEC agreed to recommend to MaPEC and the Board that POCL should
go ahead to award a contract, provided the final financial evaluation remains
broadly consistent with the costs and risks identified in the paper and noted that
subject to final decisions by the joint Project Steering Committee, ‘Dick’ was
the best option.
4 ‘There was no other business and a meeting review was not conducted on this
occasion.
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