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MP4)... MAJOR PROJECTS EXPENDITURE COMMITTEE
BRIEFING ON THE AUTOMATION OF BENEFIT PAYMENT AT POST OFFICES
Background
The Benefits Agency (BA) is Post Office Counters Limited's largest client, accounting for aver 33% of
business volume and value. Mosgigencficiaries (85%) are paid through post offices using order books or Green
Girocheques, The rest are paid by automated credit wansfer (ACT) to a bank account. Payment through post
offices costs the BA more (in both their internal costs and POCL and Girobank foes) than ACT and is viewed
as more prone to fraud. Last year the Department of Social Secarity proposed making ACT compulsory for all
beneficiaries with a suitable bank account. This would have meant a major logs of Counters’ business and
would have resulted in outlet closures. After extensive public and parliamentary debate these options were
rejected and BA and POCL. were asked to develop an option for modernising benefit payment through post
offices, which the Post Office and Department of Trade and Industry had put forward.
Medium Term Plans
A joint BA/POCL feasibility stady reported in February 1994, recommending a two stage approach: bar~
coding of order books as a first phase followed by the introduction of plastic card based payment once all post
offices have been automated. These proposals have a timescale which would result in all post offices being
automated and all beneficiaries paid via plastic cards by the year 2000. Both systems would use counter
temninals with access to payment details; only payments authorised by the BA could be made and so fraud
would be substantially reduced. The plastic card system would also allow the BA to make administrative
savings.
Verification of payee identity via biometrics (such as finger print scanners) has received considerable press
attention, It was considered in the feasibility stady but use at the counter was niled out at present on grounds
of customer acceptability, reliability and cost.
‘This feasibility report has been distributed to Ministers and senior officials in DSS, DTI and the Treasury.
Short Term Plans - Alert
in parallel with this investigation of mediam term options, the BA have been looking at ways of combating
fraud now. A less sophisticated system , "Alert*, using bar codes and an automated stop list (but without access
to full payment details at the counter) has been on trial in 180 North London post offices. This uses equipment
leased by the BA from a private sector supplier, HTEC, who also manage the system. Alert prevents the use of
books reported as stolen or cancelled by the BA and put on the stop list and allows such books to be retained if
they are presented for payment. The trial has been successful and BA estimate that extension to the whole
London area (inside the M25) would prevent fraud worth £40m per annum.
A joint BA and POCL review of the Alert trial and the feasibility study proposals has concluded that Alert
should be extended in order to make some early fraud savings, while the medium term systems are under
development. To ensure that short term solutions do not compromise the strategic developments, the current
HTEC type of equipment would not be used; instead a PC-based system would be implemented. This would be
able to support the medium term strategic developments once the BA have made necessary enhancements to
their central computer systems and once the required telecommunications infrastructure is in place.
BA have now proposed the implementation of Alert on PC-based equipment in 1478 London post offices with
4200 serving positions. (Around 10% of the UK total.) They published a notice in the European Journal
inviting expressions of interest for providing and running all or part of such a system. There have been around
60 respondents including major clearing banks, facilities managers, telecommunications companies, computer
manufacturers, An Post, Girobank, SSL - and iT who have beon added at POCL's request (and who will
maintain separation between staff seconded to POCL to work on requirement specification and staff preparing
any iT tender).
Current Position
BA and POCL are jointly developing an Operational Requirement against which tenders could be invited. It is
still uncertain whether the DSS will go ahead and issue this, or whether - at least in the short term - they may
decide to ask POCL and iT to provide the service based on the Farnborough System Management Centre and
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‘The current position is complex. Politically, BA would find it difficult to follow any other route than issuing
the Operational Requirement to European Journal respondents, though this is not a legally binding
requirement. However they now accopt that this will resalt in a longer timescale and greater risk than using
existing Post Office call-off contracts which have already been subjected to tendering. It is also not clear
whether they will have the necessary funding to go ahead
‘This means that a short term arrangement with the Post Office providing a system for the London area, but
with options lor subsequent market testing and possible transfer te a private sector contractor, may be agreed
in the next fow weeks.
Strategic Issues
Potentially this is a very important strategic development for both Counters and The Group as a whole. The
facilities provided for the Benefits Agency could pot a terminal on every post office counter position, supported
by an extensive teleconumunications infrastructure. This would realise a long-standing POCL strategic
objective with assured support from our largest client
These facilities would be available for developing automated products for other clients, developing new
business including hybrid products {in collaboration with other parts of The Group), and would help achieve
efficiency savings in outlets and centrally.
It will be important for POCL. to achieve a sound contractual framework for the developments, so as fo ensure
effective commercial control of core business processes including:
» acceptability of the retail service provided to customers including providing other clients’ products,
« control of retail standards including outlet equipment and change control for the new systems;
* control of associated processes including the management of converging data streams and providing a
single interface to clients;
» financial integrity for the client and associated controls;
« a stable contract with the BA, long enough to assure POCL of a return on any investment for BA.
Investment requirements
Current best estimates for the recommended option, as shown in the joint BA/POCL feasibility report are at
Annex A. (Because of the restricted scope of the feasibility study and for commercial reasons, this assessment
does not include any costs or benefits for other Post Office applications sharing the facilities. This is currently
being examined by POCL.)
There are many issues still to be resolved and so these estimates are very provisional, however they do show a
project which is highly effective in public expenditure terms; and so suggest that, provided funding issucs can
be resolved, it should be possible to devise a way forward which is mutually beneficial for the Post Office and
the DSS,
The Next Steps
POCL will continue discussions with BA with the objectives of safeguarding our commercial position and
obtaining a satisfactory return on any investment,
issues currently being discussed include the following:
® Who will fund Alert and/or medium term systems: the BA or POCL (recovering costs in higher fees),
@ Possible use of private sector financing, whether BA or POCL or both would hold any contract with a
private sector partner,
® Boundaries between BA and POCL control of the parts of the system, especially as regards support for
other clients and agents;
® Migration of existing POCL applications, especially ECCO+ and Automated Payments, onto the new
equipment; there is only room for one terminal at a counter position,
When agreement in principle has been reached, a proposal will be put to MaPEC. Given the negotiating
climate, it may then be necessary to reach a decision quickly, while the agreement with BA is on the table.
R Peaple
POCL Resources Director
April 1994
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Annex A
FOR THE BA/POCL DEVELOPMENT REPORT
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SUMMARY COSTS & SAVINGS
RECOMMENDED IMPLEMENTATION
fen
i Set up costs
a) Capital (87,82)
b) Non-recurring revenue: 39.99)
2 Annual ronning costs (P28)
3 Savings
a) Fraud 109.40
b) BA administration T7867
¢) POCL administration 19.58
4 Cumulative NPV by year 6 36146
8 Steady state cash flow 133.84
Notes
Savings/costs are to total project including both POCL and BA
components. Capital inchades £4.31m for BA systems and NRR-
includes £16.15m.
Discount rate used for NPV is 6% (Le. agreed to use BA
assumptions.)
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