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e DRAFT LETTER FOR THE SIGNATURE OF MR JOHNSON TO
Charles Clarke MP
Minister of State
Home Office
PERFORMANCE AND INNOVATION UNIT STUDY ON THE FUTURE OF
THE POST OFFICE NETWORK
As you know, the Horizon Working Group which I chair was established by Stephen
Byers shortly after the linked decisions to proceed with the Horizon project but
without the benefit payment card, and to allow the Benefits Agency to migrate
benefit recipients to payment of their benefts via the automated credit system over a
two year period from 2003-2005. The Group’s remit is both to oversee the
successful rollout of the project to all offices throughout the network by the Spring
of 2001, and to contribute so far as possible to its commercial success.
Our work therefore necessarily has a somewhat narrower focus than the study by the
Performance and Innovation Unit into the future of the counters network, but will
take place over a much longer period. We nevertheless thought that your team might
benefit from the work we have carried out to date, and the limited conclusions we
have so far been able to draw from it. We are currently exploring further in
particular the scope for a substantial expansion of the agency arrangements that Post
Office Counters Ltd has with a number of high street banks to offer front end
banking facilities to customers at post offices, and the scope for the counters network
to become a major delivery channel for the forthcoming range of electronic
government services. We hope to complete our initial work on both subjects within
the first few weeks of the New Year, and we will then let you have a further note
summarising our findings and conclusions.
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JOINT SUBMISSION BY THE HORIZON WORKING GROUP TO THE
PERFORMANCE AND INNOVATION UNIT STUDY ON THE POST
OFFICE NETWORK
INTRODUCTION
1. The Horizon Working Group was established by the Secretary of State for
Trade and Industry following the Government's decision in May this year to
restructure the Horizon project, notably by discontinuing the Benefit Payment Card
element of the project, removing DSS/BA as a party to the contract, and revising the
contractual basis to that of a conventional procurement rather than the previous
private finance initiative (PFI) basis. The Government also agreed to contribute
substantially towards the capital costs of the project by allowing the Post Office to
liquidate £480 million of assets already held on their balance sheet. In a parallel
decision the Government decided that the existing paper-based methods of paying
social security benefits at post offices would be phased out over a two year period
starting in 2003, and would be replaced by modern electronic means using the
existing automated credit transfer system (ACT).
2. Against an expectation that the Horizon platform would by 2003 have enabled
Post Office Counters (POCL) to substantially expand its commercial arrangements
with the banks, allowing bank customers to access their accounts at post offices the
Government offered assurances that all those benefit recipients who wished to do so
would continue to be able to access their benefits in cash at post offices both before
and after the changeover. However, the ability to deliver this commitment depends
on the success of POCL in establishing the necessary commercial arrangements with
the banks, over which the Government has no direct control. The Government
stressed that there would be no change to the existing methods of payment before
2003. POCL currently earn some £400 million a year (about one-third of their total
income) from carrying out this work on behalf of the Benefits Agency.
MEMBERSHIP AND REMIT
3. The Group is chaired by Alan Johnson, Minister for Competitiveness at the
DTI, with membership drawn from the main stakeholders in the Post Office
Counters business, namely Post Office Counters Ltd (POCL) itself, the National
Federation of Sub-Postmasters who represent the interests of the nearly 18 000 sub-
postmasters who run the vast majority of the network outlets (which in turn account
for somewhere between 40 000 and 70 000 jobs, many of them part-time, and many
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@ in areas where alternative employment opportunities are limited); the
Communication Workers Union (CWU) representing around 11 000 frontline staff
working in the 600 Crown Offices and in headquarters (and around 165 000 non-
management grades in the whole of the Post Office; and the Communication
Managers Association representing around 1500 managers within the Counters
business.
4.
The Group was given a remit to contribute to ensuring that the agreement in
principle between POCL and ICL (the system supplier) signed on 24 May was
carried through to a full agreement; to oversee the roll out of Horizon to all offices in
the network within the agreed timescale; to contribute to the smooth migration from
paper based methods of paying benefits to payment via ACT; and to contribute to
maximising the commercial potential of the Horizon platform and hence the future
viability of the counters network. The Group is therefore dealing with all the main
stakeholders in the project, and will particularly be looking to establish ongoing
dialogue with officials and Ministers in DSS as plans to migrate benefit payments
are developed in the run-up to 2003.
5.
Specifically, the terms of reference of the Group are
“Tn relation to carrying forward the work on the POCL/ICL Horizon project:
© to oversee the negotiations between POCL and ICL which will develop the
letter of agreement signed between the parties on 24 May into a Codified
Agreement governing the contractual relationship under which the project
will be taken forward, together with the consequential arrangements
between POCL and the Benefits Agency; and to facilitate solutions to any
problems which may arise;
© to oversee, to contribute actively to, and to facilitate solutions where
problems arise, the completion of the development phases of the Horizon
project, and in particular the smooth and timely roll-out of the system to all
offices within the post office network, and the subsequent satisfactory
migration of benefit payments from the present paper-based methods to
more modern, ACT-based, methods of payment accessible through post
offices; and
e to contribute through ideas, contacts and other practical measures, to
maximising the commercial potential of the Horizon infrastructure and the
future viability of the post office network as a whole.”
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@ THE HORIZON PROJECT
6. The Horizon project was initiated under the previous Administration. Its
objectives were to automate the network of post offices in order to make existing
business more efficient and help to win new business; to provide a more secure and
efficient way of paying social security benefits by replacing the existing paper-based
methods by a magnetic strip benefit payment card; and to provide the Department of
Social Security/Benefits Agency (DSS/BA) with the means to account fully for their
vast programme expenditure.
7. The project was by any standard huge, worth some £1 billion, involving
automation in 19 000 post offices and 40 000 counter positions; and providing links
into DSS/BA and PO systems. The agreement to take forward the project on a PFI
basis was signed in May 1996 between POCL, DSS/BA and ICL Pathway as the
private sector partner. However it emerged over the next few months that the project
was necessarily of a complexity which had not previously been fully understood and
by February 1997 substantial revisions to the timetable for the project were agreed
by all the parties. Despite this there were further significant slippages and by March
1998 the project was almost two years behind even the revised timetable agreed in
February 1997. At the same time, ICL sought a change in contractual terms either in
the form of an extension to the contract (to allow them further time to recover their
costs) or increases in charges. At that point Ministers established an
interdepartmental working group comprising officials from the DTI, DSS, Treasury
and CITU to advise on the way forward for the project. Intensive efforts over the
following 14 months involving substantial external assistance on technical
evaluation and commercial facilitation resulted in the decision by Ministers
described at paragraph 1 above.
THE NETWORK CHARACTERISTICS
8. Post Office Counters Limited is a wholly owned subsidiary of the Post Office.
It oversees the nationwide network of post offices, negotiating and co-ordinating the
contracts with Government bodies and other clients which provide business for the
network. The post office network comprises more than 18 500 outlets. Six hundred
of these comprise the directly run and staffed Crown Offices which account for
some £240 million of assets. The remainder are run on an agency basis, the vast
majority by private individuals. The network thus represents a partnership between
the public and private sectors, with subpostmasters investing over £1 billion of their
own money to provide the outlets which comprise over 95 % of the post office
network. In addition it is estimated that subpostmasters have invested at least a
similar amount again in the private retail businesses that operate in synergy with the
post office, often being dependent on the customer footfall attracted into the site by
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@ the post office activity there. Around 85% of post offices share premises with
another retail business, enabling cost-effective operation of the post office through
shared overheads, whilst generating additional trade for the retail business through
the “footfall” effect of benefit recipients collecting their benefit cash at the post
office counter, and staying to make purchases from the retail side of the business.
9. Although the post office counters network has been shrinking by some 200
offices a year for some years now, as subpostmasters leave and replacements cannot
be found, it remains the largest retail network in Europe. Statistics show that around
94% of the UK population live within a mile of a post office (99.9% within 5 miles),
compared to 75% for all banks and building societies combined and 32% for major
supermarkets. It is also estimated that 28 million people per week make around 45
million visits to a post office each week.
10. The post office network provides communities with access to a wide range of
services (some 170 products), of which the most important include access to postal
services, benefit payments, cash, banking and bill payment services, licensing and
other Government services and a range of other customer driven services (e.g.
lottery, bureau de change, insurance). Small businesses are also reliant on the
network e.g. 90 % of small businesses with less than 9 employees use the post
office, mainly for access to banking/deposit facilities, cash provisioning and access
to mail services. Around 25% of all notes and coins in circulation in the UK are
acquired across a post office counter.
11. Numerically rural post offices account for almost half the network (57% of
tural parishes have a post office, less than 10% have a bank or building society), yet
they account for less than 20% of the network’s turnover. The post office outlet is
particularly valuable in rural areas where neighbourhood village shops are often only
able to survive in the face of retail pressures because of the income which operating
a post office provides. The village post office and store can provide a focal point in
the community providing access to cash and essential everyday items, an
information centre in areas where frequently other retail and banking facilities are
absent. The accessibility of such post offices is crucial to the least mobile sections
of the community - poor, elderly, infirm, mothers with young children, etc.
12. As in rural areas, post offices in urban deprived areas pay a particularly
important role. Here also the post office is often the last remaining shop and
financial services outlet in a neighbourhood. The post office in such communities
can also act as a lynch pin in sustaining the local centre, having the potential to
generally increase the amount of trade of other shops located in its vicinity (a
somewhat wider manifestation of the “footfall” effect referred to above). Post Office
statistics show that 92% of deprived wards have a post office and, in more than one
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e third of the most deprived wards in England and Wales, covering almost three
million people, there is at least one post office but no bank or building society. As
banks and building societies continue to prune and rationalise their branch networks
and their customer base, the number of deprived wards and customer segments
dependent solely on the post office seems certain to continue to rise.
13. A further significant statistic in terms of the potential value of the post office
network as a delivery channel for services which contribute towards achieving the
Government’s objectives in combatting various forms of social exclusion is that post
office customers in deprived urban areas carry out 33% more business at their post
office than the national average. As almost all adults visit a post office the post
office customer profile matches the population profile closely. The visit profile is,
however, more weighted towards the Es (31% compared with 29%), older people
(24% for 65 plus as compared with 20%) and women ( 56% compared with 51%).
14. Distribution of pensions and benefits is a significant element of the business
transacted at post offices in these areas. The range of products available at post
offices makes them particularly well suited to meeting the needs of the socially
disadvantaged, for example schemes for easy budgeting for household bills through
traditional well-tried methods such as saving stamps (as well as their modern
replacement, the plastic card). As well as providing access to cash - vital to those on
low incomes and/or who currently lack access to a bank account - post offices offer a
range of financial products aimed at this market including National Savings Pass
Book accounts allowing small sums of money to be saved, postal orders for easy
money transmission and more recently insurance products such as bill payment
cover, tailored for this market.
15. Currently around half of Post Office Counters’ income is derived from its
contracts with Government departments and agencies, including the Benefits
Agency, the Driver and Vehicle Licensing Authority and the Department for
National Savings. By far the largest of these is the contract with the Benefits
Agency which runs until 2005, accounts for more than one-third of POCL’s total
income, and constitutes the UK’s largest single service agreement. In more than
8 000 post offices BA work accounts for 40% or more of the total income. The
impending loss of income from the BA, as a result of the Government decision to
migrate payments to ACT, will therefore be a significant blow to the finances of
POCL and adds sharply to the case for securing stability in the remaining public
sector contracts.
16. The loss of benefits will also affect bill and budget payments which account
for some 15% of POCL's income. Around 45% of bill and budget payment
transactions are generated as a result of benefit encashment and there will also be
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e similar dependence on benefit transactions for some of the services highlighted
below. Other business includes Royal Mail/Parcelforce business which accounts for
around 20 % of POCL’s income. New services such as the sale of lottery tickets,
bureau de change facilities, insurance products and simple banking transactions for
banks other than Girobank generate about 10 per cent of POCL's business. It is this
successful provision of diverse products and services that the Post Office must be
looking to expand in future. It has already shown, with the National Lottery in
particular, that it can deliver and has the ability to be competitive and flexible (in
terms of opening hours). The Government will be looking to capitalise on the
success of the network in delivering this, and recognises the role of the Post Office
in making the Lottery a success.
17. In summary, the Post Office network has significant strengths in terms of its
social and geographical reach. Over 95% of the outlets in the network operate using
the agency 'model' with its long-standing, successful track record of combining
private and public investment to make the continued existence of the overall network
possible. However this 'model' is underpinned in the agents' eyes by the perception
of a relatively stable ongoing income/footfall generation capability. Therein lies,
however, a vulnerability - because if agents' confidence in that model is undermined
and they cannot see a viable future in operating an individual outlet they may be
forced to withdraw from operating post offices and the network becomes at risk of
collapsing. The remaining 5% of the outlets in the network - the directly run and
staffed Crown offices - which are mainly in urban areas account for some 20% of the
throughput of the network.
A POST OFFICE SMARTCARD
18. Against the background of the Government’s decision on the way forward for
the Horizon project set out in paragraphs 1 and 2 above, and the network
characteristics described in paragraphs 7 to 16, the Horizon Working Group has
begun to examine the wider commercial potential of the Horizon platform. As noted
above, the Benefit Payment Card had from the outset been at the heart of the
Horizon project (and arguably a major cause of the delay and cost escalation), and
the decision to discontinue it changed substantially the nature of the project from a
technical viewpoint and also affected significantly the project's commercial
potential.
19. The technical simplification which resulted from removal of the card, and the
contractual simplification which flowed from it, enabled a clear goal of equipping
every counter position at every Post Office throughout the land by Spring 2001 to be
set. However the decision to migrate all social security benefits to payment by ACT
over a two year period starting in 2003 not only stands to lose POCL some £400m a
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e year in revenue from BA once the migration has been completed, but the loss of the
Benefit Payment Card risks removing an important commercial opportunity which
the Horizon platform could otherwise have provided.
20. It had been considered that the Benefit Payment Card might become a
smartcard over time thus creating an important database for commercial application.
In particular, the introduction of smartcard technology would have assisted many
benefits recipients towards becoming socially and financially included by
introducing them to card based financial products and services. No other
commercial or Government application is currently known that could justify the Post
Office launching its own smartcard at this point in time. However, the Post Office
continues to search for suitable commercial opportunities to develop a
multi-application smartcard. Widespread use of smartcards will require a secure,
integrated, trusted and nationwide network of acceptance points and the Post Office
is therefore well placed to fulfil this future.
21. The Horizon Working Group therefore believes that the early identification of
alternative applications which would justify the creation of a Post Office smartcard
as a basis for unlocking a further series of commercial opportunities could play an
important part in helping to replace revenue lost from BA. However this window of
opportunity may be strictly time limited, since despite the Post Office’s trusted
image and ubiquitous availability, there are likely to be overwhelming “first to
market” advantages.
WORKING WITH THE GRAIN OF WIDER GOVERNMENT OBJECTIVES
22. The Group has also been looking at two further key areas of activity in which
the existence of the Horizon platform can be expected to open up significant
commercial opportunities. The first of these is network banking, to which reference
has already been made. The second is the electronic interface between the public
and Government, government agencies, local authorities etc. The electronic delivery
of public sector services has been branded as "electronic government" or
"Modernising Government" but is referred to generically by the Post Office as
"Government Gateway". In looking at these, and in future at other areas of potential
commercial opportunity for the Horizon platform, the Group will be concerned to
look beyond simply the straight commercial potential for the Post Office, important
though that unquestionably is, and to explore in addition the extent to which such
developments could best be carried forward in a way which would work with the
grain of wider Government objectives rather than against it.
23. It is clear to the Group that a combination of the unique reach of the counters
network, the social groups who regularly use and trust it, and the potential of the
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e Horizon network combine to create a powerful weapon in the campaign against
social exclusion, particularly in the fields of financial, retail and IT exclusion; and in
the Government’s wish to communicate with citizens in a modern, convenient and
cost effective manner.
BANKING
24. The development of network banking facilities at post offices forms an
important part of POCL’s plans for the future, but is also key to the Government’s
plans to migrate to the payment of benefits by ACT from 2003. POCL already has
agreements in place with Alliance and Leicester Girobank, the Cooperative Bank
and Lloyds TSB. But these arrangements rely on slow and expensive paper-based
transactions, which severely constrain the scope for any major expansion of POCL’s
network banking activities. The Horizon platform offers the promise of removing
that constraint, and opens up a scenario in which a combination of, on the one hand;
the apparent desire by the High Street banks to continue apace with branch
rationalisation programmes, closing some and refocusing the remainder on selling
activities;
e yet at the same time wanting to enhance rather than reduce the service they are
able to offer their customers;
¢ whilst also at the same time needing to accommodate large numbers of new
accounts (powerfully driven by Government policies) of a kind for which they
might normally have little or no appetite;
and, on the other hand,
the ubiquity of the nationwide network of post offices;
© its trusted image with the public, and especially that sector of it unused to, and
probably mistrustful of, the existing financial institutions and
¢ its long experience in carrying out a wide range of financial transactions on an
agency basis;
together with
e POCL’s need to find additional business to replace the revenue stream from the
Benefits Agency;
© the desirability of keeping as many benefit recipients as possible within the post
office system, not least to retain the “footfall” effect for the retail side of subpost
offices; and
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the desirability of maintaining as far as possible a balancing outflow (through
withdrawals from a large number of bank accounts) for the large inflows of cash
in the form of corporate deposits especially from small and medium sized
companies;
and
¢ the Government’s need to honour its commitment that all benefit recipients who
wish to do so will be able to access their benefits in cash at post offices both
before and after the migration to ACT from 2003 - as well as securing a credible
means of ensuring that benefit recipients living away from the major
concentrations of banks and ATMs can in practice access their benefits in cash
without undue expense or difficulty;
begin to take on the appearance of - potentially at least - an extraordinarily
serendipitous fit.
25. The reality may be less clear cut. There are important questions of timing.
The longer Horizon is delayed, the more likely it is that the banks will have moved
to develop alternative solutions. There are technical issues still to be fully resolved
about the suitability of Horizon as presently configured to handle potentially very
large numbers of on-line transactions, and about the interface between Horizon and
the banks’ systems. Perhaps above all lies the question of how much the banks will
be willing to pay POCL for providing front-end banking on an agency basis,
especially if many of the accounts are of marginal profitability (if at all) for them.
26. The Horizon Working Group will be pursuing these issues with POCL and
other interested parties, such as DSS/Benefits Agency, HM Treasury and other
public sector clients. It will also be important to ensure that relevant parallel strands
of Government activity, such as the ongoing work on social exclusion, are properly
integrated into the process. As an example, the work of Policy Action Team 14 on
financial exclusion highlights the important contribution that the counters network ,
equipped with the Horizon platform and offering front-end banking facilities, can
make towards combatting financial exclusion particularly in rural and deprived
urban areas.
GOVERNMENT GATEWAY
27. A-second important area of potential opportunity for POCL which the Horizon
platform can open up is the delivery of Modern Government or Government
Gateway applications on behalf of central, regional and local government. The Prime
Minister announced in 1997 that by 2002, 25% of dealings with Government should
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e@ be capable of being conducted by the public electronically. It has also been
proposed that, subject to certain exceptions, 50% of dealings should be capable of
electronic delivery by 2005 and 100% by 2008.
28. However although the potential here would appear to be enormous, there
remain at this stage very great uncertainties as to timing, as to the share of such work
post office counters might be expected to attract in competition with a multiplicity of
alternative delivery channels, and as to the value of the revenue streams that POCL
might generate from such work.
29. It is clear that the counters network has a number of powerful advantages as a
potential delivery channel for Government services. Its ubiquity and its trusted
image have already been referred to, and when combined with the customer profile
described in paragraph 12, give the network an ability to reach large sections of the
community for whom electronic access would otherwise be denied or perceived to
be threatening.
30. However, there is uncertainty as to the speed with which the Modernising
Government programme will come on-stream on a significant scale. There are also
predictions that very large numbers of households, including the C, D and E
socio-economic groups, may acquire access to the Internet through digital television
a great deal more quickly than predicted. although equally there are doubts about the
functionality of the early generation of set top boxes and whether many segments of
society will wish to transact with Government in this way.
31. Whilst detailed assessments have been made of the significant savings to
Government expected to flow from more modern ways of interfacing with the
citizen, the price which Government will expect to pay will in practice take account
of the prices charged by alternative delivery channels. It is believed that some third
party delivery channels may be prepared to deliver certain Government services
without charge/at low cost. It is likely that such cases will involve the simpler
services for high net worth customers via only low cost electronic channels.
Although this commercial model may have very limited coverage there is a real
danger that it could be used as a benchmark for fee setting. This could impact on the
economics of more universal multi-channel providers.
32. The Horizon Working Group is at a very early stage in its consideration of the
potential of Modern Government applications for the counters network, and is due
shortly to take delivery of a paper from CITU aimed at providing the Group with a
policy perspective.
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e 33. Once again on Government Gateway the timing and sequence of events is
crucial. The Post Office network provides an existing, proven channel which
citizens freely choose to use in their interactions with Government. Indeed, half of
the work that post offices do at present is of this nature (albeit on an unautomated
basis). The value of such an existing proven channel for Government business was
clearly demonstrated in the recent passport crisis where the contingency use of post
offices was able to resolve public outcry at the passport backlogs last summer.
34. Moreover research using the People’s Panel demonstrates that post offices are
the preferred location for one-stop shops for Government services. Banks and
supermarkets scored lower in this research for reasons such as staff knowledge, fear
of cross-selling and the potential for inconsistent approaches from different
companies. Proposals for alternative channels for Modern Government (such as
digital interactive TV), rely on volatile forecasts and speculation about the customer
preference for interacting with Government through such a channel which are
unproven at present.
35. Insummary, there appears to be considerable potential in utilising the
counters channel as a route for Modernising Government and such an approach
could certainly help in the future retention of network. However, there remain areas
of debate around the Modernising Government agenda. There is a concern that if
such debate takes too long to resolve, the risk increases that the network is lost, only
for there to be the belated discovery that it provided a preferable and effective route
for Modern Government after all.
CONCLUSION
36. The Horizon Working Group very much welcomes the work on which the
PIU has now embarked, and which we see as complementary to our own task. We
believe that the Horizon platform offers the counters network its best hope of a
viable longer term future, and we will work towards maximising that potential.
Whilst we hope that the results of our efforts will go some way to reducing the gap
which will be left in POCL’s income when current annual revenue of some £400
million from BA begins to fall away from 2003 onwards, it is doubtful whether
revenue from new commercial activities can bridge the gap fully, at least from the
outset. Setting this work in the wider context which forms the remit of the PIU
study, and ensuring that relevant strands of parallel activity within Government such
as the ongoing work on social exclusion are properly integrated into the process,
should serve to provide Ministers with valuable insights to assist them in the
decisions they will need to take on the future of the counters network.
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oe 37. The Working Group is also seized of the critical importance that the
timing/sequence of events/ announcements could have on the network. If any future
development of the network is to be an ordered, managed process, confidence in the
sub-office market must be maintained. The Working Group has already heard that it
may be 18 months before Benefits Agency plans for ACT are finalised. There is a
significant risk that there will be a hole in the timing through which the network will
fall. This could therefore happen before the positive actions, which might realise the
potential of the network for the nation and avoid the fall-out from the loss, can be
brought to bear.
38. Weare, of course, happy to provide further information or clarification on our
work so far, and on the next stages of our programme. In any event we feel it will be
useful for our two groups to remain in touch and to exchange views and information
over the coming weeks.
Horizon Working Group
22 December 1999.
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