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Bringing Technology to Post Offices and Benefit Payments
FINANCIAL EVALUATION OF TENDERS RECEIVED ON 22 APRIL 1996
Author: Michael Purchase and Keith Baines Version: Issue 1.0
Authority: Keith Baines 29 April 1996
Reference: I PWKP4-42
Contents Page
1. INTRODUCTION...
1.1, Purpose.....
% 1.2. Background...
1,3. Report Structure.
2. SUMMARY.
2.1. Introduction .
2.2. Full Life Costs ..
2.3. Supplier Charges .
2.4. Attributable Costs
2.5. Sensitivity Analyses
2.6. Financial Conclusions
3. BASELINE RESULTS..
3.1. Tender Evaluation Baseline.......
3.2. Full-life Costs
4. SUPPLIER CHARGES ..
4.1. Charging Structures
4.2. Supplier Transaction Charges.
4.3. Off-Scorecard Charges
4.4. Charges for Change...
4.5. Comparison with Previous Tenders......
5. INTERNAL COSTS AND BENEFITS
5.1. Introduction .
5.2. BA and SSA Internal Costs & Benefit
5.3. POCL Internal Costs & Benefits......
6. SPRR QUANTIFIED RISKS AND BENEFITS
6.1. Risk Register ...
6.2. Benefits Register
7. SENSITIVITY ANALYSES...
7.1. Introduction ..
7.2. Volume Sensitivitie:
7.3. Benefit Customer Behaviour...
7.4. Roll-out Timescale and Strategy ..
7.5. Charges for Change...
7.6. Attributable Costs Sensitivities ...
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7.7. Combinations of Sensitivities
7.8. Summary...
8. RISK TRANSFER
8.1. Introduction ......
8.2. Design and Service Construction Risks
8.3. Commissioning Risks..
8.4. Operating Risks
8.5. Fraud Risks...
8.6. Volume Risks ..
8.7. Technology Risks
8.8. Residual Value Ri:
8.9. Regulation/Policy Risk
8.10. Project Financing Risks
8.11. Inflation Ris!
_, 8.12. Conclusions
be 9. SPONSOR COMMERCIAL ISSUES .
9.1. Comparison of Costs for each Sponsor
9.2. Costs of OBCS..
9.3. Card Distribution
9.4. Fraud Liability ..
ANNEX A - DISCOUNTED CASH FLOW TABLES
ANNEX B - SENSITIVITIES
ANNEX C - CASH FLOW CHARTS...
1. INTRODUCTION
1.1. Purpose
1.1.1. This paper reports the findings of the financial evaluation of the revised tenders
submitted by Cardlink, IBM and Pathway on 22 April 1996 in response to the
invitation to re-tender (ITR) issued on 16 April. These were submitted following
discussions with suppliers and updated their initial tenders submitted on 21 March
1996 in response to the BA/POCL invitation to tender (ITT) issued on 29 February
1996. This paper supports the overall evaluation results and recommendations set
out in paper PWKP4-43, which also describes the re-tendering process.
1.1.2. The Evaluation Board are invited to approve this paper as presenting a true and fair
view of the financial evaluation (but noting that in some areas it has not been
possible to complete all the intended analyses, since some of the necessary data
following clarification with two of the suppliers were not available until Saturday 27
April). And for the Board to consider the findings given in Section 2 with the
recommendations given in the paper PWKP4-43 to select the winning supplier.
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1.1.3. The BA, SSA and POCL commercial teams are directed to Section 9 which sets out
factors for consideration in the sponsor commercial negotiations.
1.2. Background
1.2.1. The financial evaluation methodology was defined in papers PWKP4-4 and
PWKP4-23. The financial evaluation forms a part of an overall evaluation process
described in the paper PWKP4-9. These, and related, papers were lodged with the
BA/POCL Programme lawyers in advance of the receipt of tenders on 21 March
1996.
1.2.2. In summary, the Financial Evaluation Team have focused on all financially
quantifiable differentiators between the tenders. The main areas include suppliers”
charges, residual risks on the Service Provider Risk Register (SPRR), internal costs
and benefits arising from different solutions and risk transfer. Estimates of the full-
“life costs of the tenders have been calculated based on a best view estimate of
business workloads (as provided in the Workload Brief in the ITT), and presented in
the form of discounted cash flow (DCF) analyses over the proposed life of the
contract resulting in a Net Present Value (NPV) figure for the full-life cost of each
tender. Against this baseline scenario, various sensitivity analyses have been
undertaken as set out in PWKP4-23 to test the validity of the initial assumptions and
the results provided in this paper. The team has also considered the financial
implications for risk transfer under the PFI agreement, and highlighted financial
factors of relevance to the commercial agreements between BA, SSA and POCL.
1.2.3. The Financial Evaluation seeks to show the relative positioning of each tender, and
not the business case position for each sponsor. However the detailed work on
supplier charges and internal costs and benefits etc. also feeds into each of the
sponsor’s business cases.
1.3. Report Structure
1.3.1. I The broad structure of the report is as follows:
. Section 1 provides the status and background of the report;
. in Section 2, the overall findings of the financial evaluation are brought to the
front of the report;
. Sections 3 to 6 set out the baseline scenario costs and their composition;
. Section 7 looks at the sensitivity analyses of varying the baseline assumptions;
. Section 8 considers the financial implications for risk transfer; and
. Section 9 identifies commercial issues for the agreements between sponsors.
1.3.2. Annexes are provided with further detail and in particular the summary of the
discounted cash flow (DCF) models.
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2. SUMMARY
This section also appears in the overall evaluation report
2.1. Introduction
2.1.1. This section provides a summary of the results of the financial evaluation
documented more fully in the financial evaluation report, paper PWKP4-42, attached.
The summary is repeated verbatim in the full report.
2.2. Full Life Costs
2.2.1. The results of the relative costs of ownership of the tenders (comprising supplier
charges and differential costs attributed to make them comparable) for the best view
business workloads are shown in Table 1. These are shown as net present values
-(NPV) for the life of the contract discounted at 6% and 12% per annum. The table
also shows the outline costs, not discounted, for the roll-out and initial Steady State
services (from contract award to February 1999) and the average annual costs for the
Steady State services.
Table I - Full Life Costs with Best View Workloads
Figures in £m Cardlink IBM Pathway
Full Life Costs: NPV 6% £1257m £992m £1041m
Difference (% of lowest) 27% 0% 5%
Full Life Costs: NPV 12% £977m £775m £819m
Difference (% of lowest) 26% 0% 6%
Roll-out £242m £208m £238m
(total of 1996/7 - 1998/9)
Steady State typical year £237m £183m £187m
(average 1999/00 - 2004/05)
2.2.2. These figures show that JBM and Pathway offer substantially lower costs than
Cardlink at the best view workloads, being around 20-25% less costly. IBM is
around 5% lower cost than Pathway. The difference is less in the steady state than
during roll-out, reflecting the fact that Pathway’s costs reduce year-on-year in both
money and constant price terms, while IBM’s money prices increase over the
contract due to partial RPI-linking.
2.2.3. Differences in the pricing structure result in a different split of these costs between
sponsors as shown in the following table:
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Figures in £m Cardlink IBM Pathway
Full Life Costs: NPV 6%
BA/SSA 847 589 663
POCL 410 404 378
Total 1,257 992 1,041
2.2.4. The next sub-sections drill-down to give explanation of:
(a) the make-up of supplier charges
(b) the main attributable costs that have been added to the charges to derive the
> above NPVs
(c) _ sensitivity analyses
(d) conclusions of the financial evaluation.
23, Supplier Charges
2.3.1. All three suppliers have submitted tenders with charging structures based on the
common charging mechanism. There are differences in their approaches evident in
the differing positions in terms of providing set prices for all or only a proportion of
optional and additional transactions and setting caveats against guarantees and
transaction volumes.
2.3.2. The NPV of the supplier charges over the life of the contract are shown in Table 2.
While these illustrate the payments due to each supplier for the best view workloads,
these figures are not directly comparable as different supplier solutions and contract
terms have differing associated costs of ownership (discussed in section 5 below).
Table 2 - Supplier Charges with Best View Workloads
Figures in £m Cardlink IBM Pathway
Supplier Charges:
° NPV 6% Yj111 906 904
© NPV 12% 864 708 714
2.3.3. I The Cardlink price is subject to significant uncertainty because their tender omitted
information on discount bands which is required in order to calculate the price for the
option in their tender which is nearest to meeting the sponsor directors’ brief for the
re-tendering exercise.
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2.3.4. To illustrate the composition of the suppliers’ charges, Figure 1 - Composition of
Supplier Charge shows the total charges for the component services over the life of
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Figure 1 - Composition of Supplier Charge
Total (£m)
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100
aigeinquny
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the contract.
2.3.5. Although Cardlink’s charges are consistently higher than the both of the other
suppliers, the higher charges are particularly notable in the Card Management area.
Pathway’s higher charge for PAS is largely offset by lower charges for BES and this
is a result of both a different system architecture and a different approach to
allocating cost areas including the premium for fraud risk transfer. This would result
in a smaller proportion of BA’s total costs being charged via POCL.
2.4. Attributable Costs
2.4.1. The following summarises the attributable costs for each sponsor.
Table 3 - Attributable Costs
Figures in £m Cardlink IBM Pathway
BA & SSA 6% NPV 102 53 91
12% NPV - 78 41 69
POCL 6% NPV 44 33 46
12% NPV 34 26 36
Total 6% NPV 146 86 136
12% NPV 112 67 105
2.4.2. The main cost areas included are:
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(a) Card Issue charges omitted from Cardlink’s tendered price;
(b) higher stationery costs of Pathway’s solution for benefit receipts;
(c) higher residual fraud risk for Pathway compared to the other suppliers;
(d) differences in contracted transaction times, with Pathway’s being significantly
longer than times they had demonstrated and IBM’s being shorter than any they
had been able to demonstrate.
2.4.3. These exclude any cost arising from the transfer of the burden of proof of fraud to the
authorities in IBM’s and Cardlink’s bids. It also excludes a possible lower cost option
for consumables in Pathway’s bid where sourcing benefit receipt stationery under
existing BA contracts rather then using the option to purchase it from Pathway could
reduce costs by around £6m per annum, equivalent to a reduction of £30m in the 6%
_NPV and £23m in the 12% NPV of costs.
2.5. Sensitivity Analyses
2.5.1. Sensitivities of the costs to changes in key assumptions have been tested. The
% following results are worthy of particular attention.
Benefit Transaction Volumes
Cardlink IBM Pathway
10% increase BA +3.1% BA +2.9% BA +3.2%
POCL -0.5% POCL -1.6% POCL -0.7%
Overall -1.9% Overall +1.0% Overall +1.8%
10% reduction BA -3.2% BA -2.9% BA -3,3%
POCL +0.5% POCL +1.7% POCL +0.7%
Overall -2.0% Overall -1.0% Overall -1.9%
2.5.2. This shows that the variability of IBM’s charges with benefit payment volume is
around half that of the other two suppliers. This is achieved by setting a discount
band break at the guarantee level which achieves a money guarantee of over 90%.
Extent of Automation of Other POCL Transactions
2.5.3. If only the Basic POCL transactions were to be implemented, charges would change
as follows:
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Cardlink IBM Pathway
BA Charges +0.7% +0.6% +0.8%
POCL Charges -17.75% -2.01% -9.91%
2.5.4. This again shows the impact of the high revenue guarantee generated by the IBM
pricing structure. Achieving the Cardlink price reduction at that level must be
doubtful given the condition in their bid which they could use to trigger a review of
prices if POCL withdrew any of the Optional transactions from the guarantee, or if
volumes of work through the system differed from current forecasts.
POCL Volumes
2.5.5. ~The pattern is similar to BA volume changes, with IBM’s prices being significantly
less variable than those of the other suppliers. At the low-line forecasts, Pathway and
Cardlink total charges would reduce by around 11.5% while IBM’s would only be
reduced by 5.6%.
BA and POCL Volumes both Reduced.
2.5.6. Again, IBM’s prices are less variable than those of the other suppliers, also their
pricing structure has the notable effect of increasing BA’s total charge in these
circumstances even though the BA volumes are lower. In this scenario, charges to
BA would reduce by 2% for Cardlink, reduce by 1% for Pathway and increase by 5%
for IBM. POCL charges would reduce in all three cases, by 37% for Cardlink, by
35% for Pathway and by 25% for IBM. Overall charges reduce by around 13.5% for
Cardlink and Pathway and by 6.7% for IBM.
2.6. Financial Conclusions
2.6.1. The analysis shows that Cardlink are significantly more expensive than the other two
suppliers for a service which approximates to sponsors’ requirements for the
retendering.
2.6.2. On supplier prices, there is little difference between IBM and Pathway. IBM is
marginally lower cost at best view volumes but becomes more expensive at lower
volumes. Above 110% of best view the IBM price is uncertain as they have not
provided pricing information. .
2.6.3. The IBM pricing structure achieves an income guarantee for them of over 90%.
2.6.4. _ IBM has lower attributable costs than the other two suppliers and this makes the total
cost of their offer lower than that from Pathway. However, there could be a
significant increase in the attributable costs as a result of the shift of burden of proof
of fraud to the authorities which is still being investigated, and there are major down-
side risks as a result of the lower fraud liability limit and the annual limit of £50m for
supplier’s liability in the event of complete failure of the service.
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2.6.5. Overall, therefore, Pathway and IBM are clearly lower cost options than Cardlink,
which is not only the most costly of the offers but also has the highest risks of
subsequent cost increases as a result of price review triggers.
2.6.6. Pathway appears to be around 5% more costly than IBM at best view workloads, but
there is a greater degree of certainty about the Pathway prices than about those of the
other suppliers Also, the overall cost of the Pathway solution may be reduced by
around £6m per annum by alternative sourcing of benefit receipt stationery. This
would make it the lowest price option.
2.6.7. There are significant down-side risks associated with IBM’s limits on fraud and
general liability. IBM’s position relative to Pathway may worsen as a result of
additional attributable costs resulting from the changed burden of proof of fraud.
€ EP _ BASELINE RESULTS
a4. Tender Evaluation Baseline
3.1.1. Each of the three suppliers submitted a single (“variant”) bid in their re-tender
documentation received on 22 April. All three have been evaluated, and the findings
given in this report refer to these re-tenders and do not consider the initial tenders
except as a top-level comparison of reduction in charges (see Section 4.5.). The
overall differences between the re-tenders and how these compare with the
invitations to re-tender for each supplier are documented in the Contract Assurance
Report (PWKP4-40) and summarised in the overall evaluation report (PWKP4-43).
3.1.2. To ensure the evaluation produces comparable figures, a common set of assumptions
have been used for the baseline evaluation scenario. These are the basis for the full-
life costs of ownership given in Section 3.2. The subsequent sensitivity tests adjust
some of these assumptions as explained later. The main attributes of the baseline
evaluation are as follows:
(a) Volumes: the business volumes (e.g. numbers of transactions, number of
cardholders, growth of other POCL client transactions) are best view estimates
taken from the Workload Brief issued with the ITT on 29 February 1996. The
baseline evaluation includes POCL Basic and Optional transactions as
communicated to suppliers through an Annex to Schedule A6 in the Invitation
to Tender; it does not include Additional transactions.
(b) Universal Functionality: the option of a reduced functionality counter
terminal in small post offices was considered and rejected by sponsor directors
prior to ITR, hence the evaluation is on the basis of the same equipment and
functionality to all automated counter positions. The number of automated
counter positions is as per Workload Brief, 39,507. The solutions now exclude
inventory management functionality in post offices, as agreed with sponsor
directors.
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(c) Roll-out Timetable: during the pre-ITR discussions with suppliers and
sponsors it was agreed to extend the contractual period for roll-out by seven
months, with implications. for remedies during roll-out and the contract end-
date. The baseline evaluation scenario uses the same roll-out profile for all
three suppliers as previously established and documented in the Workload
Brief. This assumes roll-out starting in January 1997 and all post offices being
automated by December 1998 (after two years). The migration of benefit
payments from order books to cards would be nearly 80% complete by this date
and fully complete by August 1999. In addition to the baseline assumptions,
section 7 includes sensitivity tests to show the effect of delays to roll-out. Later
in this report, figures are provided to illustrate the comparative costs of roll-out.
For simplicity, and transparency of the calculation, this is taken as the sum of
the charges for the years 1996/97, 1997/98 and 1998/99.
(d) Period of Contract: as the contractual period for roll-out was extended by
: seven months by the pre-ITR discussions, and the period of the contract was
advertised in the OJEC notice as five years from the planned end of roll-out,
the overall period of the contract was also extended by seven months to end in
February 2005. In the financial evaluation, the discounted cash flows (DCF)
show the payments and costs falling due each financial year (i.e. from 1 April
to 31 March) between 1996/97 and 2004/05. The contract identifies “payment
years” as running from 1 March to the end of February, with payment due
within a month. Hence the volumes given between March and February in the
Workload Brief correlate with the charges for each financial year on the DCFs;
and the last year of the contract (2004/05) shows charges for a full twelve
month’s workload.
(e) Benefit Card Issue: the baseline evaluation includes all costs for issue of
benefits cards. The default position is that the supplier sub-contracts POCL to
provide part of this service, and then includes these costs within their CMS
charges to BA. From the POCL perspective, card issue is treated as being cost
neutral for evaluation purposes as they would recover their costs from the
supplier. The report notes where suppliers have deviated from this model and
adjusts the costs to be comparable as far as is possible.
(f) CAPS Gateway: the tenders are evaluated on the basis of there being four
gateways between the suppliers’ systems and CAPS, one to each DSS Area
Computer Centre (ACC). Where suppliers have not included this in their
tenders, an attributable cost to BA has been added.
(g) OBCS: the Order Book Control Service is included within the baseline
calculations. The additional costs and benefits of including OBCS are discussed
in Section 9.2.
(h) Receipt Storage and Retrieval: the requirement for the suppliers to provide a
receipt storage and retrieval service was withdrawn by the ITR. Cardlink did
submit an additional proposal to provide this service and takeover the Lisahally
facility. However this is outside the scope of the current draft agreements, and
would be progressed if required after contract award.
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(i) Asset Transfer: the baseline position on asset transfer is that no assets would
be transferred on award of contract, and that asset transfers (such as for
Lisahally or ALPS equipment) would be addressed post-award.
(j) Inflation: the baseline evaluation assumes a constant RPI of 3% over the
period of the contract. This is included in the suppliers’ charges as directed in
their tenders and added to the attributed sponsors’ internal costs as appropriate.
Section # considers the effects of increases in inflation.
3.1.3. Where a supplier’s tender deviated from the common baseline, costs have been
attributed or the charges adjusted (e.g. by adjusting the volumes or applying a costed
option declared in the tender) to make the full costs of ownership comparable. These
adjustments are identified in later sections.
3.2. _ Full-life Costs
3.2.1. This section gives the overall relative costs of ownership of the tenders, comprising
supplier charges and differential costs attributed to make them comparable, for the
baseline scenario. Details of the discounted cash flow (DCF) analyses are provided
in Annex A. Towards the bottom right corner of each DCF, the net present value
(NPV) of the cost of ownership for each tender is shown. These are given in Table 4
below (rounded to the nearest £10m), with the percentage increase of the two higher
values over the lowest. These are shown as net present values (NPV) for the life of
the contract discounted at 6% and 12% per annum.
Table 4 - Full Life Costs with Best View Workloads
Figures in £m Cardlink IBM Pathway
Full Life Costs: NPV 6% £1257m £992m £1041m
Difference (% of lowest) 27% 0% 5%
Full Life Costs: NPV 12% £977m £775m £819m
Difference (% of lowest) 26% 0% 6%
3.2.2. These figures show that JBM and Pathway offer substantially lower costs than
Cardlink at the best view workloads, being around 20-25% less costly. IBM is
around 5% lower cost than Pathway.
Cost Profiles
3.2.3. To illustrate what these figures mean in terms of costs for roll-out and steady state,
Table 5 shows the broad costs, not discounted, for the initial roll-out and Steady State
services (the sum of 1996/97, 1997/98 and 1998/99) and the average annual costs for
the Steady State services.
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Table 5 - Roll-out and Steady State Costs (Undiscounted)
Figures in £m Cardlink IBM Pathway
Roll-out £242m £208m £238m
(total of 1996/7 - 1998/9)
Steady State typical year £237m £183m £187m
(average 1999/00 - 2004/05)
3.2.4. Again, this shows Cardlink consistently more costly than the other two suppliers. The
difference between IBM and Pathway is less in the steady state than during roll-out.
This reflects the fact that Pathway’s costs have a 10% reduction in money terms over
the contract while IBM’s are constant. In addition Pathway accept inflation risk in
full up to 6% per annum whereas IBM would require annual price increases of
~around two thirds of the increase in RPI up to a maximum of 3% for a 5% RPI
increase.
3.2.5. The suppliers’ charges grow significantly during the roll-out period as the number of
post offices and transactions are automated, and then subsequently plateau or in some
cases decline as future price reductions apply. This profile is shown in the charts at
Annex C which show annual and cumulative annual charges for each of the suppliers
over the contract life.
Split of Costs of Ownership between Sponsors
w
iv
a
The split of overall costs between the sponsors is shown in Table 6. This shows the
total NPVs discounted at 6% and at 12%. BA and SSA costs are combined here;
however the split of the supplier charges between BA and SSA is given in Section
Oi.
Table 6 - Split of Costs between Sponsors
NPVs in £m Cardlink IBM Pathway
BA/SSA costs at 6% £847m £589m £663m
BA/SSA costs at 12% £655m £459m £520m
Split (%) 67% 59% 64%
POCL costs at 6% £410m £404m £378m
POCL costs at 12% 321m £316m £299m
Split (%) 33% 41% 36%
3.2.7. The Benefit Encashment Service charges which POCL would re-charge to BA/SSA
are included in the BA/SSA costs in this table. The higher percentage charge by IBM
for POCL’s other transactions seems to have arisen because IBM have sought to
recover a higher proportion of their charges for the benefit services through BES and
a lower proportion through PAS and CMS than the other suppliers. Combined with
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the small number of columns in their scorecard this has resulted in higher charges for
simpler POCL transactions such as basic EPOS products.
Presentation of Charges and Costs on the DCFs
The DCFs show the figures in three groups relating to BA/SSA, to POCL and to the
overall totals. Each set of rows shows supplier charges separately from the
attributable costs relating to the suppliers’ solutions. The initial columns across the
DCFs show the years of the proposed term of the contract (covering the cash flows
arising in the period 1 April to 31 March each year). The summary columns to the
right hand side of the table give totals across the contract, raw and discounted at 6%
and 12% per annum and also show (as supporting information) the undiscounted
totals for “Roll-out” and an average “Steady State” year as described above.
Further breakdowns of the supplier charges is available from the evaluation team, and
~a further explanation of the sponsors internal costs and benefits can be found in the
respective confidential reports to each sponsor.
SUPPLIER CHARGES
Charging Structures
The charges payable to suppliers are considered under three categories:
. transaction charges (based on the common charging mechanism scorecard);
. off-scorecard charges, covering any additional charges due; and
. charges for change.
These are discussed further under sections 4.2 to 4.4. All three tenders received on 22
April were based on the common charging mechanism. This had been defined to
suppliers by the Programme in discussions before the invitation to tender and was
confirmed in the ITT documentation (in Schedule A6 and the associated guidance
notes). There are, however, significant differences between the approaches taken in
the different bids. To illustrate the degree of detail and conformance, the following
table indicates the relative performance of the suppliers’ approaches (where Y is
worst, and VY vv is best). The position on payment period is also shown.
Table 7 - Comparison of Charging Mechanisms
Cardlink IBM Pathway
Score Card Detail viv v vVvVV Vv
Guarantee Levels vvv v vv Vv
Discount Bands viv v vv v
Score-card Coverage vv v VvVVY VV
Change Control Triggers v viv vvvv
Price Trends viv vvv vvv vv
Payment Period Quarterly Quarterly Monthly
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4.1.3. The main points arising from the tenders are summarised below for each of these
headings.
Advantages I Disadvantages I Comments
Score Card Detail
Cardlink easy to understand - not enough service Mid-way between the
very few transaction separation to assure other suppliers in
types; fair allocation between I terms of the column-
écpiiiiina put some bes ne POCL level detail
DSS/POCL activities
e.g. Smart key No discount bands
specified for the
“menu” of priced
options
. 1BM simple to understand _ I very few columns and
® I therefore not possible
to verify fairness
between sponsors
and/or between
transactions
Pathway clearly defined service I rather complex now basing DSS
components; charges on “per
minimises unfair customer session”
allocation of charges metric like the other
suppliers.
% Guarantee Levels
Cardlink Guaranteed income ‘Approach on reviewing
approximately in line I volumes and rebasing
with volume scorecard after first
percentages; best view I steady state year could
volumes are within the I result in effective 100%
basic price band. guarantee for that
year.
IBM Set first discount band
at guarantee levels.
Pricing structure
results in income
guarantees in excess
of 90%
Pathway Guarantee Income guarantees
percentages broadly I approximately 5%
acceptable higher than volume
guarantees as result of
discount structure.
Discount Bands
Cardlink Basic service plus 6 No discount band
discount bands. First information provided
band starts at just for compliant options in
above best view the tender
volumes
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Advantages Disadvantages Comments
\BM only 2 price bands. Price not defined
Breakpoint is at above 110% of best
guarantee level. No view. This would not
further reductions accommodate the
above best view. POCL high line
forecasts.
Pathway 2 price bands for CMS,
6 for other services.
Scorecard coverage
Cardlink Clear transaction Many transactions
definitions omitted or provided as
indicative only. Card
distribution sub-
contract not included in
scorecard charges.
_I IBM Many transactions
omitted or provided as
indicative only.
Pathway Most transactions Transaction definitions
included and priced,
less developed than for
other suppliers
Change Control Triggers
Cardlink
Many physical limits
and review points
which could result in
price increases
through change
control.
IBM
‘A number of physical
limits and review points
(though fewer than for
Cardlink) which could
result in price
increases through
change control
Pathway
Generally fewer limits
and more realistic
levels than for the
other suppliers.
Prices would be
increased in the event
of any reduction in
frequency of benefit
payments.
Price Trends
Cardlink
Level prices with RPI-
1% indexing
IBM
Level prices with Doubling of prices in
indexing of around 2/3 I original tender has
of RPI up to maximum I been eliminated
increase of 3% p.a.
Pathway
10% price reduction
over the steady state
period. Absorb inflation
up to 6% p.a.
Prices would rise by
half of any excess RPI
increase above 6%
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4.1.4.
4.2.
4.2.1.
The effect of monthly payment to Pathway has been taken into account in the
calculation of NPVs by increasing the discounted costs to allow for the fact that on
average payments would be 2 months earlier than under quarterly invoicing.
Supplier Transaction Charges
The suppliers’ charges are broken down into component services and summarised in
Table 8 and Table 9 which give the NPV (discounted at 6% and 12%) over the life of
the contract and the average annual steady state charges (not discounted)
respectively.
Table 8 - NPV Supplier Charges with Best View Workloads
NPV at 6% (£m) Cardlink IBM Pathway
-I CMS Charges 301 155 168
PAS Charges 137 101 203
BES Charges 307 279 200
POCL Charges (excl. BES) 366 370 332
Total Transaction Charges 1,111 906 904
Difference (% of lowest) 22% 0% 0%
NPV at 12% (£m) Cardlink IBM Pathway
CMS Charges 233 124 130
PAS Charges 105 79 161
BES Charges 239 219 159
POCL Charges (excl. BES) 287 290 264
Total Transaction Charges 864 708 714
Difference (% of lowest) 22% 0% 1%
Table 9 - Annual Charges for Steady State (Average, Undiscounted)
Figures in £m Cardlink IBM Pathway
CMS Charges 59 30 32
PAS Charges 27 19 35
BES Charges 57 51 34
POCL Charges (excl. BES) 66 67 58
Total Transaction Charges 209 167 159
Difference (% of lowest) 31% 5% 0%
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4.2.2. A further illustration of the relative charges for each supplier is shown in Table 10,
which gives examples of charges per transaction for various types of transaction.
These represent the marginal charges that would apply for increases and decreases in
transaction volumes, prior to application of volume guarantees, discount bands and
charge review triggers.
Table 10 - Charges for Typical Transactions (per transaction in 2001/02)
—=
Figures in pence Cardlink IBM Pathway +
Benefit Encashment at 10.3 12.8 9.6
Nominated Office = 48
IS
Benefit Encashment at 10.3 12.8 113
% _I foreign office 14.8*
APS Smartcard Transaction 8.1 6.5 5.8
Sale of Stamps 3.3 3.4 2.8
* Pathway transactions using extended procedures with them accepting fraud liability
on customer verification failures.
Reconciliation with Suppliers own Totals
4.2.3. The evaluation team found the total charges for the best view volumes calculated by
the suppliers differed from those calculated by the team. These differences and the
underlying reasons were as follows.
Table 11 - Differences between Supplier and Programme Calculations
Figures in £m (outturn prices) Cardlink IBM Pathway
Charges calculated by 1517 1242 1120
Evaluation Team
Charges calculated by * 1207 1034+
Suppliers in their tenders
Difference * 35 85
* Comparisons were not possible with Cardlink’s totals because they only provided
them on the basis of a longer contract.
+ Pathway comparison related to the steady state period only as no totals were
provided by them for the roll-out period.
4.2.4. The main differences were due to basic and/or optional transactions being omitted
from the suppliers’ models and to suppliers’ use of volumes which were different
from those in the Workload Brief. The two most significant cases were resolved
during clarification of retenders. IBM had mis-calculated the number of OBCS
transactions and this had resulted in over-statement of volumes and charges during
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a
&
4.3.
aii.
4.4.
4.4.1.
4.4.2.
4.5.
4.5.1.
the roll-out period. They provided new phasing of the charges which corrected this
while maintaining the same total price. Pathway had misunderstood the benefit
transaction data in the workload brief as referring to individual payments rather than
to customer visits to the post office. Review of the information they had been given
confirmed that their interpretation had been based on a reasonable alternative reading
of the information, and they were asked to correct their prices in the affected services.
Off-Scorecard Charges
Some elements of supplier charges are not included in the scorecard. The main areas
are:
. staff training (in addition to the initial training provided during the roll-out)
. training manuals and guides
. customer education and publicity
These all relate to optional services for a specific sponsor and have been included in
the internal costs and savings sections of the analysis described in section 5 below.
Charges for Change.
The contractual position is to transfer the risk of design and development, and to
some extent maintenance, to the suppliers. This is evident from the approach to
contract for services against a predefined set of business requirements and service
levels with payments not becoming due until an accepted service is in operation.
While it is likely that there will be some amendments to the requirements after
contract award, it is difficult to justify a differential between suppliers when the
nature of such changes is as yet unclear. Where the extent to which requirements for
change were met, differed between suppliers, compensating amounts were included
in the internal costs of BA or POCL as appropriate.
In addition, each of the suppliers was asked to provide resource rates for staff that
would be taken into account when considering changes. This is considered under the
sensitivity tests in Section 7.5.
Comparison with Previous Tenders
The evaluation of the initial tenders submitted on 21 March was incomplete as this
was superseded by the re-tendering process. However, the broad level of
improvements in suppliers’ charges is shown in Table 12, which compares the NPV
supplier charges (discounted at 6%) for the best view volumes.
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Table 12 - Comparison of ITT and ITR NPV Charges (6%)
Figures in £m Cardlink IBM Pathway
Initial tenders (ITT 21/3/96) 1,550 1,530 1,270
Latest tenders (ITR 22/4/96) 1,111 906 904
Difference 439 624 366
% improvement 28% 41% 29%
4.5.2. _ These figures show that, as well as clarifying specific terms with the suppliers, the re-
tendering exercise improved the baseline supplier charges by between 29% and 41%.
In the case of IBM part of the improvement was a result of them correcting an error
in their previous pricing model and of correction of their misunderstanding of the
intended contract end date in the ITT. These improvements are significant and
-although they have to an extent been offset by increased internal costs in sponsors as
a result of transferring work back into sponsor domains, there has been a significant
overall improvement in the position.
&
5. INTERNAL COSTS AND BENEFITS
$4. Introduction
5.1.1. The Financial Evaluation Team included two sub-teams to focus on the internal costs
and benefits arising from the tenders for:
. BA and SSA, and
. POCL.
5.1.2. This was primarily to retain the confidentiality of sponsor-specific matters, as well as
to focus the staff with the appropriate background and experience.
5.1.3. In order to maintain confidentiality, each team have reported the net value of the
costs and benefits with associated commentary for inclusion in this report. Hence
readers should take note of the relative values between suppliers, and no inferences
should be taken from any individual figures as the baseline is not disclosed. The
details of the individual cost and benefit items are documented separately in an
Internal Costs and Benefits Report for each sponsor respectively. The summary of net
costs is provided below.
5.2. BA and SSA Internal Costs & Benefits
5.2.1. The specific items costed are detailed in the separate BA/SSA Internal Costs and
Benefits report. In summary, the main items contributing to these differences are as
follows:-
. Consumables for BES services.
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. Estimated fraud levels inherent in suppliers solutions.
. Service level attributable costs.
. Card issue restrictions.
. CAPS interface issues.
. Allowance for migration to Integrated Circuit (IC) card technology.
. Provision in score cards for publicity & training.
5.2.2. Consumables figures have been included for BES related stationery & the provision
of starter packs. BES consumables calculations have used supplier quotes for both
- usage rates & unit costs. The main differential is around Pathway’s solution which
“uses a relatively expensive BA slip. However, we have received a more competitive
quote for BA slips from HMSO. Given all suppliers treat the provision of
consumables as an optional service, there could be further scope for savings.
Although the Pathway slip is relatively expensive, there may be benefits (not
included in the figures) of reduced handling costs for receipts, compared with the till
rolls used by IBM & Cardlink.
5.2.3. I There are further issues around internal costs not included in cash flows, given the
problems of measurement. They are summarised as follows:-
. The reasons for BA staff requiring help desk support. This is heavily reliant on
the on line interfaces provided by CAPS. All suppliers have placed limits on
the number of calls within their score cards, without defining costs over &
above these limits.
. The provision for MIS.
. Proposals rejected by Sponsor Directors but still incorporated in retender. This
is relevant for Cardlink. For example: some element of scope changes; risk of
loss/damage to equipment to be taken by Authorities; exclusion of implied
requirements.
. The costs of non-compliance with the Welsh Language Act 1993.
. Costs of change control over life of contracts.
. Costs of posts award negotiation & clarifications.
Table 13 - BA Internal Costs and Benefits
Cardlink IBM Pathway
fim £m £m
Total Cashflow 136 71 123
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NPV@ 6% 102 53 91
NPV @ 12% 78 41 69
Ss POCL Internal Costs & Benefits
5.3.1. I The major differentiators included in the evaluation of POCL internal costs relate to
contracted transaction times, fraud liability and an analysis of Service: Level
Agreements. Several other material areas have been evaluated through adjustments
in the scorecard pricing structure and are reflected in the supplier charges.
8 - A summary of the results is shown below:
Table 14 - POCL Internal Costs and Benefits
Cardlink IBM Pathway
£m £m £m
Total Cashflow 57 43 60
NPV@ 6% 44 33 46
NPV @ 12% 34 26 36
5.3.2. I The major reason for the large benefit of IBM for internal cost purposes is that they
are contracting for a significantly shorter BES transaction time.
Other items included in the attributable costs are:
. Losses on encashment fraud
. Service Level Agreements (SLAs)
. Site Modifications
. Back office printers not provided by IBM
5.3.3. Although IBM shows the lowest cost to POCL in the above evaluation, there is an
issue surrounding whether they are able to deliver the transaction times in the SLA
Schedule. They have been credited for this benefit above, even though they have
been unable to demonstrate their ability to achieve the proposed SLA target time.
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6. SPRR QUANTIFIED RISKS AND BENEFITS
6.1. Risk Register
The Service Provider Risk Register (SPRR) was maintained throughout the Stage 3
Contract Development and Demonstrator process. It was made clear to suppliers
from the start that severity “B” risk items on the SPRR would lead to a cost being
attributed to their tender, at the Programme’s discretion.
6.1.2. At the end of Stage 3, there were five severity “B” risks outstanding against Pathway
and none for Cardlink or IBM as documented by the Risk Assessment Panel (RAP) in
paper PROD4-08. The RAP also quantified attributable costs against Cardlink and
JBM arising from the findings of the Security Review with respect to “Fraud and Risk
management”, already addressed for Pathway by one of its “B” risks.
©6.1.3. ~Since the end of Stage 3, each of the supplier’s positions on fraud has moved on
causing the Evaluation Team to revisit the Fraud-type attributable costs for each. As
a result, the following attributable costs are included against each supplier:
Risk Quantified I
Cardlink
Residual Fraud
Quantification
£2.6m 3 year total during roll-out
£2.3m p.a. in steady state
IBM
Residual Fraud
£2.2m 3 year total during roll-out
£1.9m p.a. in steady state
Pathway
Residual Fraud
£5.9m 3 year total during roll-out
£4.5m p.a. in steady state
DICK066: Strong sequence
numbering in Riposte
(Severity B3, Probability 5)
£900,000 one-off cost during implementation, incurred in
proportion to number of automated counter positions, to
upgrade counter equipment.
DICK002: Size of Escher
(Severity B3, Probability 4)
DICK057: Contractual
relationships (Severity B3,
Probability 5)
£10,000 per annum to cover additional contract
management time to manage relationship.
6.1.4.
The “Residual Fraud” figures are based on:
(a) the assessment by the Security Review of the residual fraud that is likely to
occur after taking account of the security attributes of the card, system and
payment procedures that were established prior to ITT; and
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(b) modifying the residual fraud by the liability accepted by the suppliers in their
tenders.
6.1.5. I The figures for the other items are explained further in paper PROD4-08.
6.2. Benefits Register
6.2.1.. The Benefits Register process identified one financially quantified benefit. This was
for an optional service offered by Cardlink with respect to fraud monitoring and
management. This is an optional service in addition to the contracted requirements
and at an additional charge. In the event that Cardlink were selected, it is assumed
that this option would be pursued. The provisional net saving after additional charges
were of the order of £4.8m with a probability of 25%. Therefore £1.2m is included
for this benefit in the internal costs and benefits for BA.
% SENSITIVITY ANALYSES
TA. Introduction
7.1.1. I The Financial Evaluation Model, PWKP4-23, set out a range of sensitivity tests to be
undertaken during the financial evaluation. Due to the time taken to establish the
suppliers’ charges for the baseline evaluation scenario, which were needed before the
sensitivities could be looked at, there has been limited time to complete these. This
section reports the outcome of these analyses, in as far as it has been possible by this
stage. Readers should note that the baseline evaluation scenario includes the Order
Book Control Service; and the exclusion (and costs) of OBCS are covered later under
Section 9.2.
7.1.2. Annex B provides details of the sensitivity results. It shows the percentage effect on
BA and POCL charges for each of the tests, which are defined in PWKP4-23. The
sections below highlight the main points.
72. Volume Sensitivities
7.2.1. The volume sensitivities show that each of the sponsors’ charges, not surprisingly,
are most sensitive to changes in their respective transaction volumes. A slight “see-
saw” effect can be seen in some cases, where one sponsor’s charges decreases (due to
few transactions) and the other’s increases slightly. This is caused by the discount
bands; whereby an overall drop in volume can increase the service-point price for all
transactions. This is most marked in the case of JBM’s charging structure which has
only two bands with a five-times difference in cost between them.
7.2.2. The BA (and SSA) charges are influenced most by the tested changes in the number
of cardholders (+/-20%), closely followed by the tested changes in the number of
benefit payment transactions (+/-10%). The combined effect of these two parameters
effects their charges from between +12% to -6% for Cardlink and Pathway, and to a
much lesser extent for JBM.
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7.2.3. In POCL’s case, their charges are most effected by changes to other POCL
transactions, varying by some +/-10% or by as much as -35% for the lowest estimates
of future automated transaction volumes.
7.2.4. In comparing the suppliers’ performance, Cardlink’s charges vary the most. This is
consistent with the fact that they have the highest annual Steady-State transaction
charges given in Section 4.2.1.
7.2.5.. Also of note, is the fact that JBM’s charges vary least with volume. This is evident
from their guarantee structure which in effect guarantees over 90% of their baseline
charges.
7.3. Benefit Customer Behaviour
7.3.1. The sensitivities for benefit customer behaviour showed relatively small effects on
-overall charges. The biggest influencer was the permanent to casual agent mix for all
three suppliers, but with widely varying effect:
. for Cardlink +/- 3.8%
. for Pathway +/- 0.4%
. for IBM +/- 0.04%
7.3.2. These differences concur with points made above about Cardlink’s higher level of
charges and JBM’s emphasis on volume guarantees.
74, Roll-out Timescale and Strategy
{to be provided}
75. Charges for Change
7.5.1. The successful supplier may negotiate additional charges for changes to the contract
after award. The main structures and payment methods are:
. to use the extant scorecard service-point prices as a basis for establishing the
transaction prices for new transactions;
. to agree a change to the service-point prices, discount bands or volume
guarantees to fund, for example, a change to the core functionality of the
infrastructure; or
. to use resource time rates as a basis for agreeing a fixed payment, or payments.
7.5.2. I On the latter point, the suppliers were asked to provide resource rates in their tenders.
Both Cardlink and Pathway provided day-rates for specific grades of resource, but
JBM did not. The Financial Evaluation Model paper, PWKP4-23, set out a sensitivity
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76.
78.
78.1.
8.1.
for adding 10 man-years and 20 man-years effort each year for BA and POCL
respectively. The comparative totals for Cardlink and Pathway are an estimated £2.0
m and £1.9m per annum, or some £16m over the period of the contract.
Attributable Costs Sensitivities
The costs attributed for the SPRR risks and the sponsors internal costs and benefits
are estimates. These estimates have been varied as appropriate when considering the
other the sensitivity tests such as for changes in business volumes. While the
accuracy of the attributable costs could be tested by considering optimistic and
pessimistic variations, the values are relatively small in comparison with the overall
level of supplier charges and so would not show anything material. In considering
other potential costs in addition to the suppliers’ charges, the more significant areas
are those for which it has not been possible to quantify costs. These are discussed in
_the business cases as, by and large, they are not differentiators.
Combinations of Sensitivities
{to be provided}
Summary
In summary, the sensitivity tests undertaken show that Cardlink’s charges are most
influenced by changes in parameters as they have the highest transaction charges. In
contrast, IBM’s show little variation downward due to the high effective level of
guarantee (over 90% of best view volumes), and soon meet an upper threshold
beyond which prices are not clearly defined in their charging structure. Pathway’s
charges do vary with parameters, but do not give cause for concern and provide the
volume incentive to the supplier which should benefit both POCL and BA.
RISK TRANSFER
Work is still in progress on this section. There are no major supplier selection issues
that have not been covered elsewhere in this report or in the contract assurance
report. However, it is recognised that. this section will be required in order to
demonstrate the PFI compliance of the selected supplier’s solution.
Introduction
This section considers the financial implications of the risks that would be transferred
under the agreements with each supplier. These are addressed under risk headings
introduced in the paper “Risk Transfer Criteria” PWKP4-13. Further consideration of
risk transfer is covered in the overall evaluation report, PWKP4-43, which
incorporates the analysis of the commercial position.
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8.2.
8.3.
8
a
8.4.
8.5.
8.6.
8.7.
8.8.
Design and Service Construction Risks
Commissioning Risks
(Commissioning equals roll-out)
Explain incentives of Guarantee structure during roll-out
Note Cardlink intention to re-base volumes at end of first year
Remedies
Implications of Timescale interlock.
“Operating Risks
SLAs - remedies, limits, liability
Cardlink - position on SLA remedies
Transaction Times, Service Availability sensitivities
Fraud Risks
Summarise standing for Fraud risks
sensitivity results
Pathway - extended procedures for fraud risks on cardholder verification
Pathway - cost of migrating to IC card within charges.
Volume Risks
Refer back to Volume sensitivity tests, vol guarantees, limits on validity of charges
Technology Risks
Refer to incentives given by operating risks and residual value risks
Note Pathway card upgrade?
Residual Value Risks
Set out basis for payment for each supplier
Give values for a comparative set of assumptions = Transfer Payment sensitivity
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8.9.
8.10.
8.10.1.
98.11.
8.12.
Regulation/Policy Risk
Termination of convenience charges
Cessation of CMS from 1999/2000 onwards sensitivity
Pathway - changes in benefit payment frequency - refer back to volume sensitivity
Project Financing Risks
There are no specific factors arising from the financial evaluation that determine the
ability of the suppliers to finance their costs. Factors, such as parent company
guarantees, are covered in the commercial report.
Inflation Risk
‘Inflation tisk with each supplier
Effect on NPV - sensitivity using growing inflation up to a plateau (realistic)
Conclusions
summarise financial implications on risk transfer
SPONSOR COMMERCIAL ISSUES
Comparison of Costs for each Sponsor
Annex A shows the components payable by each sponsor and their attributed costs.
The following table shows the percentage costs payable by each sponsor for each
supplier, with the total NPV figures at 6% given in brackets.
Figures in £ millions BA/SSA POCL
Cardlink 67% (745) 33% (332)
IBM 59% (536) 41% (370)
Pathway 63% (572) 37% (332)
Charges for SSA
The following table estimates the charges to SSA based on the forecast proportion of
benefit payment transactions.
£000s. 1996/7 I1997/8 {1998/9 {1999/00 [2000/01 {2001/02 I2002/03 [2003/04 I2004/05
Cardlink 21 1074) 4212 6002 5794 5722) 5654 5576 5522
IBM 33} 1027] 3198 4394) 4237] 4077 3924 3769) 3623
Pathway 34 1413} 3851 4845) 4525 4254 3944 3649] 3386
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Fairness
9.1.2. A key premise of the Common Charging Structure was to demonstrate fairness (in
terms of no cross-subsidy) between the sponsors. As stated previously, all three
suppliers have tendered using the common charging structure. However, there are
significant differences in the number of columns and hence in the precision with
which cost areas can be allocated to the transactions incurring them. There are
particular concerns with the IBM scorecard where there are very few columns and the
discount structure seems to result in cross-subsidy between sponsors at volumes
different from the best view.
9.1.3. Section 4.2 above gives further details of supplier charges.
9.2. -Costs of OBCS
The following table compares costs with and without OBCS for the three suppliers in
terms of the total charges over the contract.
BA/SSA Costs POCL Costs
Inc. Exe. Difference I Inc. Exc. Difference
Cardlink I 989 977 12 482 482 0
IBM 706 623 83 487 487 0
Pathway I 746 728 18 430 432 2
2. Card Distribution
Suppliers have not been consistent in their treatment of costs associated with card
distribution and issue. Although they have been told that they will contract with BA
for this card distribution service and use POCL as a subcontractor at their own
choice, charges have been included by IBM in the POCL section of the scorecard.
This would imply IBM invoicing POCL who would add staff costs and re-invoice to
IBM who would then include it in the CMS charges to BA.
9.4. Fraud Liability
There are significant differences between suppliers’ acceptance of fraud risk and
therefore the amount of residual risk to be carried by sponsors. This may have
implications for the contracts between BA/SSA and POCL.
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ANNEX A - DISCOUNTED CASH FLOW TABLES
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Summary of Cash Flows and Totals
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Steady State
19967 «1997/8» 1998/9 1999/00 200001 200102 «2002032003704 2004/05 Total NPV@6% NPV@12% Total _
Cardiink
BA Charges 488,130 25,097,539 108,284,581 144,622,210 144,133,701 143,041,277 142,054,941 141,171,723 139,809,721 988,703,822 744,770,430 $77,219,891 133,870,249 142,472,262
BA Internals 183.091 2,898,072 12,277,075 17,563,570 20,739,961 20,739,961 20,739,961 20,730,961 20,739,961 136,621,615 101,943,108 78,274,036 15,358.239 20,210,563
BA Total 671,221 27,995,611 120,561,656 162,185,780 164,873,663 163,781,238 162,794,902 161,911,684 160,549,683 1,125,325,437 846,713,536 655,493,928 149,226,488 162,682,825
POCL Charges 964,201 24,160,693 $7,939,383 67,096,642 67,614,387 66,942,008 66,277,537 65,620,864 64,964,655 481,540,358 966,382,597 286,915,329 83,084,277 66,400,349
POCL internals 500,119 2,778,188 6,419,601 7,886,254 7,928,254 7,944,176 7,965,406 7,991,943 7,901,943 57,406,095 43,617,021 34,196,529 9,698,108 7,951,331
POCL Total 1.484321 26,998,881 64,350,183 74,922,907 75,542,642 74,686,182 74,242,943 73,612,807 72,956,598 538,946,463 400,949,618 321,051,857 92,782,385 74,960,600
Total Charges: 1,472,331 49,258,232 166,223,963 211,658,852 211,748,089 209,983,282 208,332,478 206,792,586 204,774,376 1,470,244,190 1,111,103,027 864,135,220 216,954,526 208,881,611
Total internals 683211 5,676,260 18,696.876 25,449,835 28,668,215 28,684,138 28,705,267 28,731,904 28,731,904 194,027,710 145,560,128 112,410,565 25,056,347 28,161,694
Overall Tota! 2.185541 54,994,492 184,920,840 237,108,688 240,416,304 238,667,420 237,037,845 235,524,401 233,506,281 1,664,271,900 1,256,663,153 976,545,785 242,010,872 237,043,505
iam
BA Charges 796,582 23,985,462 82,216,565 105,872,075 105,396,033 101,916,236 98,594,571 95,417,007 91,723,643 705,918,175 535,641,923 418,081,989 105,998,609 99,819,928
BA Internals 174 1,212,565 7,195,698 10,294,201 10,387,951 10,367,951 10,387,951 10,387,951 10,387,951 70,582,394 —§2.8677,976 40,752,058 8.348.437 10,372,326
BA Total 796,755 25,198,026 89,352,265 116,166,277 115,783,984 112,304,187 108,982,522 105,804,958 102,111,594 776,500,569 588,519,899 458,834,047 115,347,047 110,192,254
POCL Charges 1.014.941 24,664,303. 57,729,394 ~ 68,136,087: 68,530,976 67,800,498 67,094,987 66,387,421 65,690,353 487,057,911 370,490,271. 290,199,580 83,408,578 67,274,889
POCL Internals. 525,256 3,112,821 '8,776,027- ‘5,598,003 5,617,994 5,624,455 5,633,071 5,643,841 5,643,841 43,175,309 33,221,197 26,341,854 9,414,104 5,626,867
POCL Total 1,540,197. 27,777,124 63,505,361 73,734,091 74,148,969. 73,433,953 72,728,068 72,031,262 71,334,194 $30,233,219 403,711,468 316,481,435 92,822,682 72,901,756
Total Charges 1.811,522 48,649,765 139,945,900 174,008,163 173,927,009 169,725,734 165,689,568 161,804,428 157,413,996 1,192,976,086 906,132,195 708,221,569 190,407,187 167,094,816
Total internat 525430 4,325,385 12,911,726 15,892,205 16,005,945 16,012,405 16,021,022 16,031,792 16,031,792 113,757,702 86,099,173 67,093,913 17,762,542 15,999,193
Overall Tota! 2,396,952 $2,975,150 182,857,626 189,900,368 189,932,954 185,738,141 181,710,590 177,836,220 173,445,788 1,306,733,788 992,231,367 I 775,315.482 208,169,729 183,094,010
Pathway
BA Charges 817,951 33,014,089 99,000,470 112,561,698 85,722,776 745,669,447 571,791,611 450,799,702 132,632,510 102,139,489
BA Internals 35,084 -2513.054 11,793,817 18,752,721 18,918,089 18,918,089 122,588,265 90,744,286 69,010,507 9,245,099 18,800,528
BA Total 782,287 30,501,096 110,794,287 135,490,773 131,479,787 125,264,543 118,016,998 111,267,196 104,640,865 868,257,712 662,535,897 $19,810,208 142,077,610 121,030,017
POCL Charges 4,198,958 27,623,195 58,817,303 65,340.054 63,314,322 59,264,981 55,263,900 51,535,634 48,049,686 430,408,322 392,283,832 263,842,147 67,699,546 57,128,129
POCL Internals (475,147 2,367,311 6,156,362 8,511,708 8,549,065 8,565,130 8,586,550 8,613,325 8,613,325 60,437,923 45,691,856 (35,573,489 8,998,821 8,573,184
POCL Total 1,674,105 29,990,506 64,973,756 73,851,761 71,863,387 67,830,111 63,850,450 60,148,959 56,663,211 490,846,245 377,975,688 299,415,636 96,638,967 65,701,313
Total Charges 2,016,909 60,637,284 187,817,864 182,078,105 175,876,021 165611,495 154,362,809 133,772,661 1,176.077,769 904,075,443 714,641,848 220,472,057 159,267,619
Total internals 439,483 145,742 17,950,179 27,264,429 27,467,154 27,483,219 27,504,639 27,531,414 183,026,188 136,436,142 104,583,906 18,243,920 27,463,711
Overall Total 2,456,392 60,491,542 175,768,043 209,342,534 203,343,175 193,004.654 181,867,448 171,436,095 161,304,075 1,359,103,957 1,040,511,584 819,225,844 238,715,977 196,791,390
Printed: 29/04/96 03:59
POL00028153
POL00028153
PWKP4-42
RESTRICTED - CONTRACTS
Last saved: 29/04/96 08:44
ANNEX B - SENSITIVITIES
29 April 1996
Page 30 of 31
Issue 1.0
POL00028153
POL00028153
Sensitivities Summary - % Change - Total Charges and IC/B Restricted - Contracts Annex B
[ Transaction Volumes
POCL - Basic Transactions Only
POCL - Alternative View of Basic, Optional
POCL - Altemative View of Basic and
‘and Additional Transctions:
Benefit Transactions - High
Benefit Transactions - Low
No. of Cardholders and Payments -
‘Optional Only
Enrolment Rate - High
PWKP4.23 Reference 6 61 54 5 5 5161 5161 23.45 23-45 23.45 23-45
Harry
BA Charges 1,925,325,437 3.10% 3.16% 0.58% 0.58% 15.17% 781% 11.18% 5.69% 0.01% 0.68% 037% 041%
POCL Charges 538,946,463, 0.52% 0.53% 0.00% 0.00% 0.00% 0.00% “1.09% 0.53% 0.18% AT T5% 92% 10.45%
Total Charges 1,884,271,900 1.92% 1.95% 041% 0.41% 10.52% 527% 7.16% 3.65% 0.05% 5.36% 27% 3.15%
Dick
BA Charges 968,257,712 318% 320% 0.00% 0.00% 5.56% 279% 11.82% 6.08% 0.08% 0.70% 0.58% 058%
POCL Charges 490,846,245, 0.88% 0.66% 0.00% 0.00% 0.00% 0.00% 1.33% 0.66% 0.70% 9.91% 7.80% 7.80%
Total Charges 1,950,103,957 1.78% 1.85% 0.00% 0.00% 359% ATT% 7.01% 3.62% 025% 3.12% 241% 241%
Tom
BA Charges 705,918,175 287% 294% 0.01% 0.01% 017% 0.08% 5.89% 3.03% 0.08% 061% 0.08% 0.40%
POCL Charges 487,057,911 1.61% 1.72% 0.01% 0.01% 0.10% 0.05% 3.22% 177% 0.27% 201% 027% 1.34%
Total Charges 1,192,976,006 1.04% 1.04% 0.00% 0.00% 0.06% 0.03% 2.13% 1.07% 0.06% 0.48% 0.06% 031%
104/96 8:56 AM Page 1 of 3
Sensitivities Summary - % Change - Total Charges and IC/B
Total Charges
BA Charges
Total Charges
Tom
BACharges
Total Charges
104/96 8:56 AM
1,125,325,497
538,946,463
1,864,271,900
968,257,712
490,846,245
1,950,103,957
705,918,175
487,057,911
1,192,976,086
Restricted - Contracts
POL00028153
POL00028153
Annex B
Transaction Volumes
37.80%
157%
2.66%
35.50%
11.34%
8.28%
25.76%
5.62%
POCL - Highest Volumes Scenario
0.43%
957%
2.85%
087%
876%
2.70%
201%
6.95%
1.85%
BA and POCL Volumes - High
23-45,51,61
263%
895%
470%
247%
802%
450%
084%
5.36%
269%
BA and POCL Volumes - Low
23-48,511
2.16%
13.79%
081%
13.40%
5.32%
24.04%
887%
Immediate Payments - High
8
0.17%
0.02%
0.10%
0.00%
0.00%
0.00%
Immediate Payments - Low
8
0.12%
0.08%
0.17%
0.02%
0.10%
0.00%
0.00%
0.00%
Counter Positions - High
0.00%
0.00%
0.94%
220%
1.40%
0.00%
0.00%
0.00%
Counter Positions - Low
0.00%
0.00%
1.73%
4.02%
257%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Page 2 of 3
POL00028153
POL00028153
Sensitivities Summary - % Change - Total Charges and IC/B Restricted - Contracts ‘Annex B
[ Benefit and Customer Behaviour ]
Foreign Encashment - High
Foreign Encashment - Low
B Agents -High
‘Agents -Low
@PermanenCasual Mix High
PWKP4.23 Reference 55 55
Harry
BACCharges 1.925,325.437 0.00% 0.00% 031% 0.31% 3.83% 3.83% 3.40% 3.40%
POCL Charges 538,946,463, 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Charges 1,864,271,900 0.00% 0.00% 021% 021% 265% 2.85% 235% 236%
Dick
BA Charges 968,257,712 0.12% 0.13% 0.04% 0.04% 038% 0.43% 0.00% 0.00%
POCL Charges 490,846,245 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Charges 1,959,103,957 0.08% 0.08% 0.02% 0.02% 0.24% 027% 0.00% 0.00%
Tom
BA Charges 705,918,175 0.00% 0.00% 0.00% 0.00% 0.04% 0.04% 0.04% 0.04%
POCL Charges 487,057,911 0.00% 0.00% 0.00% 0.00% 0.03% 0.03% 0.02% 0.02%
Total Charges 1,192,976,088 0.00% 0.00% 0.00% 0.00% 0.02% 0.02% 0.01% 0.01%
104/96 8:56 AM
Page 3 of 3
Sensitivities Summary - % Change in NPV @ 6% - Total Charges and IC/B
Total Charges
104/96 8:57 AM
846,713,536
409,940,618
1,256,663,153,
662,535,897
377,975,888
1,040,511,584
595,641,923
370,490,271
906,132,195
Restricted Contracts
POL00028153
POL00028153
Annex B
‘Transaction Volumes
Benefit Transactions - High
2.95%
0.49%
1.82%
3.02%
081%
1.69%
270%
0.98%
Benefit Transactions - Low
3.00%
050%
1185%
3.12%
062%
175%
277%
161%
0.98%
0.00%
0.00%
0.00%
0.01%
0.01%
0.00%
0.00%
0.00%
0.00%
0.01%
0.01%
0.00%
Cardholders - Increased
15.20%
0.00%
10.49%
5.49%
0.00%
347%
0.16%
0.10%
0.06%
st
7.82%
0.00%
5.26%
276%
0.00%
ATA
0.08%
0.05%
0.03%
11.44%
126%
6.78%
551%
3.04%
201%
No. of Cardholders and Payments -
I
5161
5.54%
0.50%
3.55%
5.88%
0.62%
3.49%
2.86%
187%
1.01%
POCL - Basic, Optional and Additional
Transactions
3
0.01%
0.14%
0.04%
0.06%
075%
0.24%
0.08%
0.06%
POCL - Basic Transactions Only
067%
17.70%
$:30%
0.78%
9.96%
3.13%
0.60%
1.97%
0.45%
POCL - Altemative View of Basic and
Optional Only
036%
921%
2.80%
0.58%
7.84%
2.44%
0.08%
027%
0.06%
POCL - Altemative View of Basic, Optional
‘and Additional Transctions
3
10.48%
3.19%
0.58%
7.84%
244%
0.41%
1.35%
031%
Page 1 of 3
Sensitivities Summary - % Change in NPV @ 6% - Total Charges and IC/B
Harry
BA Charges
Total Charges
Total Charges
104/96 8:57 AM
846,713,596
409,949,618
1,256,663,153
662,535,807
377,975,688
1,040,511,584
535,641,923
370,490,271
906,132,195
Restricted Contracts
POL00028153
POL00028153
‘Transaction Volumes
POCL - Lowest Volumes Scenario
1.18%
37.78%
11.66%
261%
35.61%
11.44%
8.28%
25.66%
5.59%
POCL - Highest Volumes Scenario
23.45
0.42%
287%
085%
875%
281%
201%
692%
1.85%
BA and POCL Volumes - High
23-45,51.61
2.40%
8.96%
462%
233%
444%
068%
5.43%
262%
B__ BAand POCL Volumes - Low
23.45.51,
2.02%
37 64%
13.76%
069%
35.27%
“13.40%
5.49%
01.02%
001%
0.00%
0.02%
001%
Immediate Payments - Low
E
0.17%
0.02%
0.10%
0.00%
0.02%
0.01%
‘Counter Positions - High
0.00%
0.00%
0.96%
222%
1.42%
0.00%
0.02%
0.01%
0.00%
0.00%
1.75%
2.60%
0.00%
0.02%
001%
0.00%
0.00%
0.00%
0.00%
0.02%
0.01%
Post Offices - Low
0.00%
0.00%
0.00%
0.00%
0.01%
Help Desk Enquiries - High
0.00%
0.00%
0.00%
0.00%
0.01%
0.00%
0.00%
0.00%
0.00%
0.01%
Page 2 of 3
Sensitivities Summary - % Change in NPV @ 6% - Total Charges and IC/B
PWKP4.23 Reference
POCL Charges
Total Charges
BA Charges
POCL Charges
Total Charges
Total Charges
104/96 8:57 AM
846,713,536
409,949,618
1,256,663,153
662,535,897
377,975,688
1,040,511,584
535,641,923,
370,490,271
906,132,195
Restricted Contracts
Benefit and Customer Behaviour
Foreign Encashment - High
&
014%
001%
0.08%
0.00%
0.02%
001%
Foreign Encashment - Low
&
0.00%
0.00%
0.14%
0.01%
0.00%
0.00%
0.02%
001%
031%
0.00%
021%
0.04%
0.00%
0.02%
0.00%
0.02%
0.01%
B Agents -Low
031%
021%
0.04%
0.00%
0.02%
0.00%
0.02%
0.01%
0.38%
0.00%
024%
0.04%
0.02%
0.01%
0.42%
0.00%
027%
0.04%
0.02%
0.01%
0.00%
0.00%
0.00%
0.04%
0.02%
0.01%
Alternative Payees - Low
337%
2.32%
0.00%
0.00%
0.00%
0.04%
0.02%
0.01%
POL00028153
POL00028153
Page 3 of 3
Sensitivities Summary - % Change in NPV @ 12% - Total Charges - IC/B
Total Charges
104/96 8:57 AM
Restricted Contracts
POL00028153
POL00028153
Transaction Volumes
846,713,536
409,949,618
1,256,663,153
662,535,807
377,975,688
1,040,511,584
535,641,923
370,490,271
906,132,195
Benefit Transactions - High
281%
0.46%
1.72%
287%
057%
1.80%
2.55%
1.43%
092%
Benefit Transactions - Low
6
0.46%
175%
297%
0.58%
-1:86%
261%
1.52%
092%
Enrolment Rate - High
053%
037%
0.00%
0.00%
0.00%
0.01%
0.01%
0.00%
and Payments -
54 st 51 5161 5161
0.53% 15.23% 7.84% 10.60% 530%
0.00% 0.00% 0.00% 0.95% 0.46%
037% 10.46% 5.25% 676% 3.45%
0.00% 5.42% 272% 11.08% 5.69%
0.00% 0.00% 0.00% 1.15% 0.58%
0.00% 3.42% 1.72% 656% 3.38%
0.01% 0.16% 0.08% 521% 270%
0.01% 0.10% 0.05% 287% 157%
0.00% 0.06% 0.03% 1.90% 0.95%
POCL - Basic, Optional and Additional
Transactions
001%
0.11%
0.03%
0.08%
072%
023%
0.08%
0.06%
POCL - Basic Transactions Only
17.85%
5.42%
077%
9.82%
3.14%
059%
1.94%
0.45%
247%
0.08%
027%
0.08%
POCL - Altemative View of Basic, Optional
‘and Additional Transctions
E
10.51%
3.23%
0.58%
788%
247%
041%
031%
Page 1 of 3
Sensitivities Summary - % Change in NPV @ 12% - Total Charges - IC/B
PWKP4.23 Reference
BACharges
POCL Charges
Total Charges
BA Charges
POCL Charges
Total Charges
Tom
BA Charges
POCL Charges
Total Charges
846,713,596
409,949,618
1,256,663,153,
662,535,897
377,975,688
1,040,511,584
535,641,923
370,490,271
906,132,195
POL00028153
POL00028153
Restricted Contracts Annex B
‘Transaction Volumes 1
POCL - Lowest Volumes Scenario
23.45
771%
14.75%
2.55%
35.63%
11.55%
820%
25.55%
557%
POCL - Highest Volumes Scenario
041%
9.52%
2.80%
064%
874%
282%
2.00%
1.64%
BA and POCL Volumes - High
23.45,5161
235%
897%
455%
220%
ant%
4.38%
053%
2.56%
017%
0.02%
0.10%
0.00%
0.01%
Immediate Payments - Low
0.12%
0.02%
0.07%
0.17%
0.02%
0.10%
0.00%
0.02%
001%
‘Counter Positions - High
0.00%
0.00%
0.00%
0.97%
224%
1.46%
0.00%
0.01%
0.00%
0.00%
0.00%
1.78%
4.08%
263%
0.00%
001%
Post Offices - High
0.00%
0.00%
0.00%
2.00%
0.00%
0.00%
001%
Post Offices - Low
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
001%
Help Desk Enquiries - High
001%
Help Desk Enquiries - Low
0.01%
Page 2 of 3
Sensitivities Summary - % Change in NPV @ 12% - Total Charges - IC/B
PWKP4.23 Reference
‘BA Charges
POCL Charges
Total Charges
BA Charges
POCL Charges
Total Charges
BA Charges
POCL Charges
Total Charges
846,713,536
409,949,618
1,256,663,153,
662,535,897
377,975,688
1,040,511,584
535,641,923
370,490,271
906,132,195
Restricted Contracts
Benefit and Customer Behaviour
Foreign Encashment - High
&
0.15%
001%
0.00%
0.00%
0.02%
001%
Foreign Encashment - Low
&
0.15%
001%
0.09%
0.00%
0.02%
001%
B Agents - High
031%
021%
0.04%
0.02%
0.00%
0.02%
0.01%
‘Agents -Low
031%
021%
0.04%
0.02%
0.00%
0.01%
@ _PermanenCasual Mix - High
3.75%
257%
0.38%
0.00%
024%
0.04%
002%
0.01%
@ Permanen/Casual Mix- Low
375%
257%
042%
0.00%
026%
0.04%
0.02%
0.01%
@ _ Allemative Payees - High
3.33%
228%
0.00%
0.00%
0.00%
0.04%
0.02%
0.01%
0.00%
0.00%
0.00%
0.04%
0.02%
0.01%
POL00028153
POL00028153
Annex B
Page 3 of 3
8
PWKP4-42 RESTRICTED - CONTRACTS
POL00028153
POL00028153
Last saved: 29/04/96 08:44
ANNEX C - CASH FLOW CHARTS
29 April 1996
Page 31 of 31
Issue 1.0
POL00028153
POL00028153
QlGo.
(ay Com isue Pe
—— I
cash row Vek ws)
+ Nod
250,000,000 + = I
—
ae
— a
ee)
==
apa
rn
.
— = ee See Gen Nee Gow ame Gees
i
1 ‘Cumulative Cash Flow
oe
seinen
samnaien I
spoon a
senon000 moll
=
sen on000
seen
aacapad
4
<— = he ml ae aan
BA : POCL Cash Flow Split
19978 1998 1999700 000/01 2001002 200203 2003/04 200405
1000000000
00000000
$07 000000
177000000
000000 I
sen000000 I
120000000 I
300,000,000
2000000
‘e092 900
BA: POCL Cumulative Cash Flow Split
199607
29.04.96 09:40