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KPMG
This report contains 73 pages
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Contents
2 Introduction 3
2.1 Background 3
2.2 Approach 3
2.3. Structure of this document 4
2.4 Qualifications 5
2.5 Acknowledgements 5
3 Summary of results 6
4 General methodology 8
4.1 Overall approach to the value for money analysis 8
4.2 Assumptions applicable to all options 9
5 Option A 12
5.1 Definition of option A 12
5.2 Financial results 12
6 Option Bl Is
6.1 Description of B1 15
6.2 Implications of B1 16
6.3 Financial results 23
7 Option B2 31
7.1 Description of B2 31
8 Option B3 35
8.1 Description of B3 35
8.2 Implications of option B3 37
8.3 Financial results 39
9 Option C : 46
9.1 Description of option C 46
9.2 Financial results 47
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Introduction
Background
In 1996 Benefits Agency (BA) and Post Office Counters Limited (POCL) signed a PFI
contract with ICL Pathway. The objective of this programme, known as Horizon, was to
develop and maintain an automated infrastructure for POCL to enable benefits to be paid
to customers using a magnetic stripe card (the Benefit Payment Card or BPC) and to
provide a platform for other POCL business.
In 1997, ICL was placed in breach of contract for failure to deliver a key contractual
milestone and subsequently there were extensive negotiations between all parties. Earlier
this year, an alternative approach, known as Option B, for the continuation of the project
was proposed. The alternative approach involved migrating benefit recipients to
Automated Credit Transfer (ACT) earlier than was originally planned, while enabling
recipients to continue to receive their benefits in cash at post office counters.
Initially exploration of the alternative approach focused on variants B1 and B2, in both
of which POCL would establish “benefit accounts” for benefits recipients into which
benefits could be paid by ACT. This approach was seen as potentially facilitating ACT
migration, creating a POCL-branded smartcard which could form a platform for the
delivery of electronic government services, and furthering social inclusion,
Subsequently, a further variant of option B - referred to as B3 - was proposed and
explored. This option involved proceeding with post office automation but with neither
the BPC nor the benefit account. Migration to ACT would still take place earlier than
planned, but would be deferred until POCL could put in place mechanisms which would
allow benefit recipients to withdraw their benefits from bank accounts in cash at post
offices.
From late March to mid-May 1999, KPMG worked with HM Treasury and the three
parties to Horizon in assessing the value for money of the various options for taking
forward the Horizon programme. This work was carried out in “real time”, informing
decisions and the evolution of thought as the Treasury review of the programme
progressed. This report formally records the results of the work.
Approach
Initially, exploration of option B focused on two variants: option B1, in which benefit
accounts would be operated by ICL, and option B2 in which they would be operated by a
number of banks with whom POCL would contract. Having participated in the process of
evolving the definitions of these options, we asked the parties to model both options
under a common set of assumptions.
It was decided by HM Treasury and the three parties that option B2 should be set aside
and option BI pursued further. We worked with the three parties to refine the
understanding of the costs associated with option BI and to agree a core set of
assumptions on which POCL and ICL could base proposed business cases. We asked the
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parties to model option BI against these core assumptions and against key sensitivities.
The results of this modelling were analysed and presented to HM Treasury.
Following presentation of this analysis, we were asked to consider the potential
implications of contract termination (option C). An initial analysis of this option was
carried out, where POCL provided their modelling and we estimated the impact on ICL
(drawing heavily on previous work on termination conducted in October 1998) and on
BA.
BA proposed a further option for the way forward, referred to as B3, where the Benefit
Payment Card would be cancelled but the core Horizon infrastructure would continue
(which is similar to option 2 in the October 1998 work). We were asked to model the
impact of B3, in isolation from POCL and ICL. We also carried out further work on
option C to ensure comparability with option B3. An analysis of the impact of options B3
and C, together with a discussion of the assumptions and associated risks, was provided
to HM Treasury.
Subsequently, POCL was asked to model option B3. The results of this modelling have
been taken into account in the analysis presented herein, adjusted as required to ensure
comparability of assumptions between options.
Throughout, our main task was to ensure that common assumptions were being used by
all parties in order to consolidate the results of each party to determine the overall impact
on the public sector. We reviewed the work of each party for reasonableness and
commented upon this but, except where specifically indicated, we have not imposed our
judgements on the workings of the different parties.
Structure of this document
Section 2 presents the results of the value for money analysis of the various options for
the way forward.
Section 3 describes the general methodology for assessing the impact on the public
sector across all options.
Section 4 presents the financial projections for option A (current programme), together
with modelling of the potential impact of a further 6-month delay.
Section 5 describes option B1 and its commercial, technical and operational implications.
Projections for option BI and the results of sensitivity analysis are presented, together
with an interpretation of the results.
Section 6 describes option B2 which was included in the initial exploration of option B,
but later set aside. .
Section 7 describes option B3, which arose during the process of exploring option B1.
Section 8 presents the results of the modelling of option C.
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Qualifications
The projections presented herein have been derived in the compressed timescales
allowed for the analysis of each option, and we have been heavily reliant on project costs
and assumptions produced by the parties. At times we were required to estimate the
impact of options - particularly for options B3 and C - in isolation of some of the parties,
based on their modelling of other options. We have not audited the cashflow models used
by the parties, but we have discussed the integrity of the models including internal
control mechanisms.
We must emphasise that the realisation of the projections is dependent on the continuing
validity of the assumptions on which they are based. This is particularly so as regards the
amount and timing of the cash flows. The limited scope for interrogating the cash flow
information produced by the parties, within the time available for the completion of each
option, should be borne in mind when considering any decision based on these
projections.
Acknowledgements
KPMG wishes to acknowledge the contribution made to this analysis by HM Treasury,
POCL, BA, DSS, DTI and ICL. The willingness of staff in these organisations to provide
information - sometimes at personal inconvenience - has been of considerable value.
In particular, we would like to acknowledge the contribution of:
HM Treasury BA DTI
Peter Schofield Vince Gaskell David Sibbick
Sarah Mullen Tony Grimshaw Isabel Anderson
Alan Mawdsley Wayne Stephens
Eugene Carragher ICL
POCL Ken Davenport Tony Oppenheim
Mena Rego Louise Walmsley Darryl Murphy (SG)
Keith Baines
Liz Blackburn Dss
Jerome Brice Sarah Graham
Tim Brown
Paul Rich
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Summary of results
Comparison of NPV's: Options A, B1, B2, B3, C and sensitivities
NPV of cashflows, as compared to the baseline, from 1999/00 to 2009/10 discounted at 6%
Options
A Adelay Bl core Bi Bihigh BSmkig B3no Cyr x
Sep0! mktg
£m im £m im £m im £m fm £m
Individual entity NPV's
BA 1,572 1,477 2,254 2,558 2,254 2,181 1,926 2,621 1,990
POCL (484) (452) (1,630) (1,904) (2,069) (1,145) (1,052) (1,886) (1,447)
Change in ICL 4 91 (289) (245) (165) (190) ( 166) 0 )
settlement
Public Sector Impact 1,202 117 335 409 21 845, 709 734 543,
NPV
Variances compared to A.
Adelay BI core BI Blhigh B3mktg B3no C2yr Cx
Sep0t mktg
im im im im im £m im £m
Individual entity NPV's
BA (95) 682 985 682 608 354 1,048 418
POCL 33° (1,146) (1,420) (1,585) (661) (568) (1,402) (963)
Change in ICL settlement (23) (403) (359) (279) (304) (280) (114) (114)
Public Sector Impact NPV (86) (868) (794) (1,182) (357) (493) (468) ( 660)
The definitions of the options are summarised in the assumptions table in appendix 1; a
more detailed description of each option can be found at the beginning of the sections on
the options.
The value for money analysis summarised in the table assumed that for all options
involving ICL, including B3, ICL would be prepared to accept a £126m NPV loss.
Following the value for money analysis, the public sector parties entered into
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negotiations with ICL for the delivery of option B3. During the negotiations, KPMG
staff supported HM Treasury in calculating the impact on cashflows of the pricing
proposals made by both private and public sectors. For completeness, appendix 6
presents the cashflows relating to the latest offer which was modelled, and which we
understand to have been the basis for the heads of agreement,
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General methodology
Overall approach to the value for money analysis
NPV calculation
The financial results in the value for money analysis are expressed as the net present
value (NPV) of real cashflows, in 1998/99 prices, from 1999/00 to 2009/10. The NPV is
calculated using a real discount rate of 6%, based on the standard discount rate used
within Government. This is not necessarily the discount rate that the BA and POCL
would use for their internal business cases.
Baseline
The financial projections for each option are presented as compared to the baseline,
“business as usual”. The cashflows in the baseline assume that there will need to be a
settlement payment to ICL to exit from the current contract, paper-based methods of
benefit payment will continue, and there will be no automation platform for POCL.
POCL’s modelling of the baseline and all options is based on its automation business
case, ie it does not include the POCL business as a whole.
The baselines originally modelled by BA and POCL have been adjusted, as follows:
@ BA’s CAPS costs and ITSA costs have been transferred from the options to the
baseline, in consultation with BA, as the activities underlying these costs are required
with paper-based mechanisms of payment;
m POCL’s income from BA, has been amended to reflect BA’s assumptions for
payments to POCL, and associated variable costs have been amended proportionately.
As a result of applying consistency in the baseline payments from BA to POCL, we
» would expect that the intra-party payments in the options should approximately net to
nil. This has not been the case. But as the net imbalance, taking into account the impact
on POCL’s variable costs as well as income, was not deemed significant in proportion to
the total, and was consistent across options, no adjustment to the BA/POCL payments
has been made in the options.
Intra-public-sector adjustments
We have made adjustments to the cashflows provided by BA and POCL to eliminate
intra-public-sector costs where applicable. Specifically, we have deducted irrecoverable
VAT and prefunding costs from POCL’s modelling. :
Presentation of BA cashflows
At a late stage, it was realised that BA cashflows had been presented based on 1997/8
prices rather than 1998/9 prices, which was the basis for the presentation of the other
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parties’ cashflows. In consultation with HM Treasury, it was decided not to alter the
presentation of the results due to the confusion that such a change would create at that
late stage, given that the change would not signifcantly affect the comparison between
options.
Impact of ICL projections on the public sector
In assessing the overall public sector impact, we have assumed that the result of the
commercial negotiations would be the net loss of £126m NPV for ICL, as they had
previously proposed in December 1998. That is, we have assumed the “funding gap”
between ICL’s NPV position (including sunk costs) and the £126m NPV loss to be an
additional cost for the public sector.
In all options ICL charging was based on the scorecard, with agreed assumptions on the
charges for benefit account transactions. The modelling was thus independent of the
parallel commercial discussions which were addressing mechanisms through which the
funding gap might be bridged. At the request of HM Treasury, an up front payment of
£180m proposed for option BI has been included in the indicative phasing of the ICL
funding gap for options B1, B2 and B3. This does not impact on the NPV calculations.
Assumptions applicable to all options
Payments from BA to POCL for paper-based transactions
To ensure consistency in the modelling prepared by BA and POCL we asked them to
assume that the floor payment ends at the start of compulsory ACT migration, except in
option A where the assumption used in the Corbett negotiations was that the floor
payment ends when ACT migration is completed. It is also assumed that even when the
floor payment ends at the beginning of ACT migration, the fixed fee element of the BA
payment continues through the ACT migration period.
Post office network size
POCL has assumed that the network size is consistent across all options. There will be
200 rural closures each year and a total of 1000 urban closures over the period of the
projections.
Network banking income
The modelling of all options has assumed that network banking income to POCL from
banks is equal to 30p per transaction - the assumption which was used during the
Corbett negotiations. There is a risk that this is unduly conservative, our work in October
1998' having assumed an income of SOp per transaction. The effect of a -higher
' Benefits Agency/Post Office Counters Limited Automation Project: Analysis of Fallback
Recommendations, KPMG, 23 October 1998
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transaction charge would be to amplify the differences between options caused by
changes in network banking volumes.
As an indication of the effect of the assumption, an initial analysis of the impact of
assuming a transaction income of 50p, suggests that the NPV differences relative to
option A of the key options would vary as follows:
Option ‘Approximate Change in NPV movement from option A
(-ve means a more adverse movement as compared to
option A)
Bi (60)
B3 With Marketing _ I 0)
B3 No Marketing (16)
Cc (40)
Cx (6)
POCL have assumed - and we have maintained this assumption in B3 in order to ensure
comparability - that the availability of network banking services via POCL does not
influence claimants’ choice of bank. That is, benefit claimants opening accounts for the
first time are not more likely to choose a bank which is a network bank; nor are
claimants likely to switch from a bank which is not a network bank to one that is.
This conservative assumption is in line with the general thrust of the network banking
strategy, whose attraction to banks is seen as being in supporting branch closures rather
than offering a competitive advantage per se.
On the other hand, we would observe that all assumptions relating to network banking
volumes are at risk, given the novel nature of the proposition and the fact that we are not
aware of detailed discussions of the (electronic) network banking proposition having
taken place with banks.
Communications architecture
In its costing of options A and BI, ICL has assumed that the ISDN-based
communications architecture planned for the initial releases of Horizon would be
retained, even when network banking is introduced.? This assumption is based on an
analysis of current cash payment transactions which indicates that these are widely
distributed.
In options B3 and C, online (ie network banking and interim cash payment) transaction
volumes initially climb more rapidly than in A. However, the maximum number of
transactions reached is lower. In order to ensure comparability between options, we have
assumed that a network architecture comparable to that currently proposed is used for all
options (other than B2 which would have entailed a significant increase in online traffic).
2 Source: telephone conversation with Tony Oppenheim, ICL, 4 May 1999
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We would observe that there is a risk that this architecture would adversely affect
transaction times due to the overhead of call setup, and that a greater proportion of online
links might therefore be required. However, on the basis of the volumes modelled, we
would expect the effect of such an increase to be broadly consistent across options.
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Option A
Definition of option A
Option A represents continuation of the Horizon programme on the basis of ICL’s
proposal of 18 December 1998.
Financial results
Scenarios
We asked each of the parties to model two scenarios for option A:
™ Option A Core - This scenario assumes that latest programme dates (slightly revised
since the Corbett negotiations last summer) are maintained.
™ Option A Delay - BA has expressed a view that the current programme is likely to
slip by at least 6 months due to the combination of a 2-month slip in Model Office
Testing arising from unresolved flaws and the embargo on BA IT development
around the year 2000. This scenario models the effect of this slip.
The modelling was based on latest forecasts of transaction volumes provided by BA,
rather than the volumes used in the value for money analysis in October 1998.
Further detail of assumptions is provided in appendix 1.
Financial results
Option A
The table below summarises the financial results for option A. Descriptions of the line
items are presented in appendix 2, and detailed cashflows are included in appendix 3.
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(Option A =m NPV]
IBA
[Payments to Pathway (431)
IACT costs, including contingency (232)
ICost of the "unbanked” (70)
CAPS savings 881
POU savings 6
Payments to POCL saved si4I
IBA net administrative savings 667I
IBA programme savings 90sI
IBA net administrative savings and programme savings 1572
IPOCL
ICapital costs and non recurring revenue costs (126)
IBA & girocheque income (714)
IBA/SSA & girocheque related ABC costs 469]
POCL bank costs: smart cards, opening accounts ete -
INetwork banking income 456
INetwork banking ABC costs G19)
INetwork banking systems charges (i)
Cost of new banking technology +
JOther POCL contribution 172I a
[Other systems charges (367)
[Loss in other POCL contribution - footfall impact (36)
lOther POCL net costs 91
\Subsidy: retail impact subpostmasters E
IPOCL net impact on profits (434)
Sub total impact on the Public Sector 1,088}
ICL funding gap (ie ICL's NPV excluding £126m) 6)
Total.cashflow impact on Public Sector 1,052,
Less ICL termination payment in baseline 150I
‘Total NPV impact on Public Sector ~~ 1202I
Option A Delay
4.2.2.2 The table below summarises the NPV movements from option A to option A delay. It
can be seen that the principal effect is an adverse impact arising from the 6-month delay
to BA administrative and programme savings.
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(Option A delay, plus A delay compared to option A imNPV £m NPV]
Adelay v option AI
Favi(adv)
BA
[Payments to Pathway (420) int
ACT costs, including contingency (209) 23
ICost of the "unbanked” (70) +
CAPS savings 822 (59)
POU savings 6 +
Payments to POCL saved 504 (10)
IBA net administrative savings 632 ea)
BA programme savings 845 (60)
IBA net administrative savings and programme savings 1A77 (95)
IPOCL
(Capital costs and non recurring revenue costs (126) z
IBA & girocheque income (699) 15I
BA/SSA & girocheque related ABC costs 451 (t)
POCL bank costs: smart cards, opening accounts ete - s
INetwork banking income 456 -
Network banking ABC costs (319) -
Network banking systems charges (iil) -
ICost of new banking technology : :
lOther POCL contribution 172 s
Other systems charges (338) 29)
Loss in other POCL contribution - footfall impact 5) 1
Other POCL net costs 97 6
Subsidy: retail impact subpostmasters : :
POCL net impact on profits a) 33
[Sub total impact on the Public Sector 1,026 (63)
ICL funding gap (ie ICL's NPV excluding £126m) (59) (23)
Total cashflow impact on Public Sector (85)
Less ICL termination payment in baseline :
[Total NPV impact on Public Sector (86)
Notes
The impact of a 6-month slip on BA has been estimated by KPMG in consultation with
BA. Note that the derivation of the cashflows for all options is presented in appendix 5.
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Option B1
Description of BY?
Principles
The BPC element of Horizon would be cancelled. Development and implementation of
the core Horizon infrastructure to support POCL automation would continue, as would
the development and implementation of the Order Book Control System (OBCS).
POCL would provide simple “benefit accounts” into which benefits could be paid by
Automated Credit Transfer (ACT) and withdrawn in cash at post office counters using a
smartcard. If necessary, POCL would seek authorisation under the Banking Act to be a
bank.
POCL would contract with ICL for the delivery and operation of a modified Horizon
infrastructure supporting the benefit account, the management of the smartcard and the
operation of the benefit accounts. It is likely that [CL would subcontract the operation of
benefit accounts, possibly to Girobank.
Once benefit accounts were available, BA would begin migration to ACT as the only
means of payment for orderbook and girocheque customers.
Functionality and operation of the benefit account
As currently defined, the benefit account would not offer the functionality of a
conventional bank account. This is intentional to avoid banks perceiving this account to
be in competition with their accounts offering fuller functionality. Services would be
_ limited to:
lm cash withdrawal at post office counters using a smart card;
balance enquiries;
= mini-statements produced at post office counters.
There would be the potential to develop additional services in the future. These might
include cash deposits and household budgeting. These services have not, however, been
assumed in any of the modelling.
For customers transferring from paper-based methods of payment to ACT, the process of
opening a benefit account would be largely automatic. It would, however, be necessary
for the customer to sign a “mandate” form at the post office counter, agreeing to both the
transfer of personal data from BA to POCL/ICL (to meet data protection requirements),
> Note that the variant of Option B1 which is described here and reflected in the financial
projections is that known as B1.2. An alternative variant, known as B1.1, in which POCL acted as
a paying agent rather than a bank, was rejected at an early stage.
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and the terms and conditions of the benefit account (eg the responsibility of the customer
to safeguard his/her PIN).
New customers would also have the option of opening benefit accounts. It would be
possible for this process to be automated in a fashion similar to that for customers
migrating from paper-based methods of payment, with information being passed from
BA to POCL/ICL. It should be noted, however, that BA would expect to charge POCL
for this service and that the costs of the service have not been included in the financial
models.‘ Alternatively, customers could open benefit accounts through personal
application at post offices.
Account closure procedures would be analogous to those for conventional bank accounts.
Timing
The current position of ICL and POCL - reflected in their draft heads of agreement for
option B1 - is that rollout of the benefit account capability would be complete by July
2002. There is a possibility that this assumption is somewhat conservative and we have
therefore included additionally the modelling of the impact of an earlier implementation
in our analysis.
Compulsory ACT migration would begin when the benefit account capability was rolled
out and is assumed to take around two years.
Implications of B1
Commercial implications for POCL
Network banking
Network banking - the provision by POCL of teller services for banks on an agency basis
- is a key element of POCL’s future strategy. The following potential impacts of option
~ Bl on the network banking strategy have been identified:
m There is a risk (over which POCL has expressed concern during the development of
the option) that by establishing itself as a bank - albeit one offering limited services -
POCL could be seen as posing a competitive threat to the banks, thus jeopardising its
network banking strategy. However, POCL would be able to reduce this risk by being
open about its strategic intent in discussions with the banks.
= The option would allow the capability of the Horizon infrastructure to handle online
banking transactions to be proven in the field prior to the introduction of network
banking. The resulting reduction in risk would tend to make the network banking
proposition more attractive to banks. -
@ Through its operation of benefit accounts, POCL would acquire customer information
which could potentially be an asset in its negotiations with banks. However, POCL
would need to consider carefully whether or not to exploit such information - a deal
* Source: telephone conversation with Ken Davenport, BA on 15 April 1999
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which provided one bank with access to customer information (for customers other
than its own) would be likely to prejudice negotiations with that bank’s competitors.
= Benefit account customers might continue to use their benefit accounts even if they
also held bank accounts for which network banking had become available. There is
thus a risk that option B1 might reduce network banking revenues.
Electronic government
By providing for the development of a smartcard-based infrastructure and the creation of
a sizeable population of holders of a POCL-branded smartcard, this option would appear
to support POCL’s electronic government strategy. However:
™ In order to exploit the potential of the card, POCL would need to develop its
electronic government services quickly, before benefit account holders migrate from
the benefit account to ACT into normal bank accounts.
™@ The benefit recipient population contains high proportions of people in higher age
groups and/or lower socio-economic groups. Research’ suggests that these groups are
among the least likely to be early adopters of electronic government due to such
factors as fear of technology.
For the purpose of this value for money analysis, the impact of electronic government
has been excluded from all options.
Conclusions
POCL faces a complex task in maximising benefit from option B1 while minimising
cost. Prior to the availability of network banking, it will need to attract and retain benefit
account customers, both to maintain footfall and to increase the future network banking
transaction base. When network banking becomes available, it will need to encourage
customers to move from benefit accounts to “network bank accounts”, both to reduce
benefit account costs and to increase network banking revenues.
Meanwhile, POCL must develop its electronic government services and successfully
market them to benefit account holders (who may be reluctant adopters of electronic
government) and to the non-benefit-recipient public. These services would need to be
firmly established before the numbers of benefit account holders began to decline
significantly.
Careful planning of the introduction and marketing of new POCL services will therefore
be required. Factors to be considered in formulating the plans will include the following.
= There will be a need to maintain the attractiveness of the benefit account in
comparison with bank accounts during the early years. During development of the
option, there has been a focus on periodicity as a continuing source of competitive
advantage for POCL. While BA has advised that, for planning purposes, no change in
the periodicity of payments via POCL should be assumed, it has indicated that it is
not in a position to guarantee that there will be no change. POCL and ICL view this as
§ Source: The View from the Queue, Cabinet Office Central IT Unit, October 1998
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a risk. If option BI is adopted, there will be a need both to explore the periodicity
issue and to consider other means of rendering the benefit account an attractive
proposition.
a There will be a need to consider carefully the relationship between POCL’s electronic
government and network banking strategies given that banks are potentially a major
channel for electronic government services. For example, POCL might wish to
explore collaborative arrangements with banks covering both network banking and
electronic government.
5.2.2 Technical and operational implications
Horizon infrastructure
5.2.2.1 Option BI has only a limited impact on the development, implementation and operation
of the Horizon infrastructure. This is reflected in the build and operating cost estimates
provided by ICL as input to the PA review.’ The table below summarises these estimates
and their derivation. We have assessed the potential variance where there are significant
uncertainties relating to the costs.
5.2.2.2 Note that the table presents only the net effects of moving from option A to option BL
rather than the full cost savings from cancelling BPC and the full costs of implementing
BI. For example, the table does not include costs for the staff who would no longer be
required to support card management for the BPC (a saving from cancelling BPC) but
would be required to support card management for the POCL bank card (an equivalent
cost associated with B1).
Impact of BI on ICL as compared to option A
Ttem TCL Discussion of Derivation Estimated
Estimate Variance
. ém) £m
DEVELOPMENT AND IMPLEMENTATION ONE-OFF COSTS:
Software development I 25 Principally development of account management “510 925
I and test system and end-to-end testing. This has been derived
by extrapolation from current programme costs.
Given that the requirement has not been fully defined
and that a project plan has not yet been prepared, the
figure is subject to significant uncertainty. The
variance shown represents [CL’s own assessment of
the uncertainty of its estimate.
Training ig This estimate assumes that a half-day training session I up to +15
will be required, covering the business rules
associated with Universal Banking and Network
Banking. This may be an underestimate,
Magnetic stripe card @ ‘Approximate cost of initial batch of cards, now
costs excluded replaced by smartcard cost included in POCL’s
modelling.
Contingency g Calculated at 20%
TOTAL £29m - £T4m with best estimate of £42: one-off cost
© Report to HMT on Option B for BA/POCL Automation Project, PA Consulting, 9 April 1999
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Impact of BI on ICL as compared to option A
Trem ICL Discussion of Derivation Estimated
Variance
im
‘STEADY STATE PER ANNUM OPERATING COST (Peak Universal Banking Population)
Data centre operating I (I) Saving from elimination of two-way overnight
costs processing with CAPS.
Reconciliation @ ‘Saving from elimination of three-way reconciliation
with BA and POCL.
Emergency payments I 3 Cost of operating help desk to carry out authorisation
checks (including fraud risk).
Magnetic stripe card oO ‘Approximate cost of new and replacement cards, now
costs excluded replaced by smartcard cost included in POCL's
modelling,
PIN reminders by post__I 2
Contingency T Calculated at 20%
Total £0-Im per annum
Bank account operation
There will be additional costs associated with the opening and operation of benefit
accounts. POCL has estimated an administrative cost of £4.50 for each new benefit
account, corresponding to an NPV cost of £45m. The cost is composed as follows.
Ttem Cost per account (2)
‘Counter time associated with signing of mandate by new customer 2
‘Transmission and storage of completed mandates 2
‘Counter time associated with PIN selection on distribution of smartcard __I 0.50
TOTAL 4.50
ICL has estimated a further steady-state cost of £20m per annum (£121m NPV) for the
administration of benefit accounts. The box below summarises the items included.
Administration of benefit accounts - items costed
retrieval of signed account mandates:
MM management of the closure of accounts, including on the death of the account holder or on the
appointment of a legal representative for the account holder (eg in the event of the account holder having
become mentally unstable);
change of account holder personal details:
(occasional) opening of accounts via help desk (as opposed to over the counter or via BA);
handling of enquiries on account history:
support for investigation of disputed account activities (eg alleged “phantom withdrawals”);
production of statements on demand (see note);
handling of lost PIN incidents.
Note: The Banking Code requires statements to be despatched automatically at least quarterly. However, it
has been assumed that an on-demand statement capability, coupled with the production of mini-statements at
the counter as part of the receipt for each withdrawal, will be acceptable. If automatic quarterly full
statements were required, costs would be significantly higher.
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The £20m per annum estimate is an indicative figure. ICL’ reports that an initial quote
received from Girobank for providing such a service suggests that the costs may be up to
50% higher. We have, however, retained the £20m as a modelling assumption since we
would anticipate that the subcontract would be subject to competition which might put a
downward pressure on price.
Encashment fraud
Option B1 transfers a number of encashment fraud risks and associated costs (such as
fraud investigation) from BA to POCL. The table below explores specific fraud risks.
The table assumes that PINs would be employed as an authentication mechanism for B1,
as proposed by ICL. POCL has reservations about the PIN mechanism and this issue is
discussed later in this subsection.
Risk ‘How treated under Option A
How treated under Option BI
Lost/stolen card or PIN I If EVP" is used, ICL bears the risk.
compromise - not
reported If signature is used and investigation
indicates that the signature was not
properly checked, POCL is liable.
Otherwise the risk is borne by BA.
The current understanding is that the
risk would be borne by POCL.
(However, there is an argument that
ICL should bear some or all of the risk
if it is controlling the customer
authentication mechanism, ie
recommending and implementing
PINs.)
POCL might seek to transfer some of
the risk to the customer. However,
under the Banking Code, the
cardholder's liability should be limited
to £50 unless he/she acted negligently.
Even where the cardholder has acted
negligently (eg by writing his/her PIN
‘on the card), there may be a policy
need to provide some compensation.
Further work would be required to
determine whether this would lead to
any greater impact on the public sector
than is currently caused by emergency
payments following, for example, theft
of order books.
Lost/stolen card or PIN I Bore by ICL.
compromise - reported
AS option A.
Counterfeit card Bome by ICL, Assessed by ICL as
being very low on the grounds that the
BPC is an unattractive target compared
with credit cards.
‘AS option A. Would be reduced further
since smartcard would be harder to
counterfeit.
Tnsider attack Borne by the organisation whose
systems are attacked.
‘As option A.
7 Source: telephone conversation with Tony Oppenheim 16 April 1999.
* The Extended Verification Process (EVP) is a mechanism for authenticating the identity of a
claimant by asking the claimant questions relating to personal information held on the Horizon
system, It is analogous to banks” practice of using knowledge of personal information (eg
mother’s maiden name) to authenticate telephone customers.
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Risk
How treated under Option A
How treated under Option BL
Card not delivered to
Bore by POCL or ICL depending on
intended recipient then I whether correct procedures were
used for fraudulent I followed.
withdrawals
‘As option A.
Repudiated transactions
Tnitial investigation is carried out by
BA.
Further investigation may be required
by BA, ICL and/or POCL.
If fraud is identified, cost is borne as
per discussion above.
Tnitial investigation is carried out by
POCL,
Further investigation may be required
by ICL and/or POCL (but not BA).
If fraud is identified, cost is bome as
per discussion above.
In summary, the principal difference between options A and BI is that, under BI, the
costs associated with the initial investigation of repudiated transactions and the risks of
fraudulent withdrawals made using an unreported lost/stolen/compromised card transfer
from BA to POCL.
BA has estimated steady-state encashment fraud savings to be £15m pa greater than
under option A, on the assumption that 100% of encashment fraud is eliminated when
benefit recipients transfer to ACT. However, because paper-based methods of payment -
with their associated fraud costs - are retained for longer than under option A, the NPV
increase in fraud savings is only £13m.
POCL has estimated an additional cost of £20m per annum (£104m NPV). This is an
indicative figure and may be an overestimate, but has been included in the modelling of
costs.’ In particular, we would not have expected a significant increase in overall fraud
costs given the analysis above.
PINs
The modelling of option BI has assumed the use of PINs as proposed by ICL. It is
important to emphasise that option B1 is not fundamentally dependent on the use of PINs
and that an alternative mechanism - most likely to be physical signature - could be used.
The issues are summarised in the table below.
‘Aspect
Without PINs (signatures used)
With PINS
Vulnerabilities
Forgery, fravd/collusion/earelessness on
the part of post office counter staff.
‘Compromise of PIN through negligence
on the part of the customer (eg writing
the PIN on the card). Unfamiliarity with
PINs (eg on the part of older customers -
who are less likely to have used ATMs -
will increase this risk.
Risk transfer TCL would be unlikely to accept any risk I It is more likely that fraud risk could be
relating to fraudulent withdrawals other I transferred, although no transfer has been
than on stopped cards. assumed in the financial models.
Costs There is no PIN pad cost. However, there I There is a cost associated with installing
would be a cost (currently included in
and operating PIN pads. The cost may be
* On BI core volume assumptions, £104m NPV corresponds to an annual cost in excess of £3 per
account. APACS figures (March 1999) suggest an average level of fraud for UK plastic cards of
around £1.20 per card (although this does not include the costs of fraud investigation).
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‘Aspect
Without PINs (signatures used)
With PINs
‘option A) associated with the storage and
retrieval of paper receipts.
higher than under Corbett since a
separate rollout may now be required.
POCL's understanding is that the cost of
PIN pads would be specific to the
provision of benefit accounts since it
assumes that signatures will be adequate
tor network banking.
Customer
acceptability
‘No issue compared with BPC. Unfamiliarity with technology may
reduce customer acceptability, impacting
the takeup of benefit accounts.
Customers may refuse PINs (as they are
entitled to do under the Banking Code)
necessitating fallback to other methods.
Transaction times I No impact compared with BPC. Transaction times may be increased , at
least in the initial years, due to a lack of
familiarity with technology on the part of
customers,
In summary, the final decision on authentication mechanisms will require a trade-off to
be made between risk, cost and customer acceptability. We would expect the final
decision to be made following further detailed assessment of these aspects by POCL and
ICL.
Impact on Benefits Agency costs and savings
Delays to automation savings
Because the move to ACT under option B1 is later than the move to BPC under option A,
savings from automation will be delayed. Steady state savings from automation are
around £137m per annum, of which around £62m are from the elimination of physical
production and postage and the remainder are from the elimination of manual processes.
Bringing forward of ACT costs
Because ACT migration occurs earlier and more quickly under option B1 than under
option A, ACT costs are increased. The steady state cost of ACT is £78m per annum.
The largest element of this (£50m) is to cover increased entitlement fraud prevention
costs, as benefit recipients will no longer be required to sign a declaration of entitlement
when they have migrated to ACT. The remainder of the steady state ACT cost comprises
payments to BACS, the provision of an alternative mechanism for urgent payments, and
contingency (£10m). There are further one-off costs associated with the initial migration
to ACT, such as project costs, training and helpdesk operation.
From BA’s perspective, the costs of ACT are offset by savings in payments to Pathway.
Savings in payments to POCL
By bringing forward ACT migration, option B1 reduces payments from BA to POCL.
However, from an overall public sector perspective, this effect represents a transfer
rather than a saving.
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Impact on ICL
Option B1 has the following impacts on ICL’s financial position:
‘a asmall increase in net costs of the Horizon infrastructure to support benefit accounts,
discussed at 5.2.2 above;
a subcontractor termination costs, amounting to approximately £30m;
m bank operation costs, also discussed at 5.2.2;
'@ net loss of revenue due to lower transaction volumes.
It has been assumed by the parties, during development of the option, that ICL’s bank
operation costs would be passed through to the public sector.
Impact on POCL
Loss of BA income and associated costs
ACT migration is earlier and quicker than in option A, and the floor payment from BA
ends at the beginning of ACT migration rather than at the end. This significantly reduces
POCL’s income, but is set against an equivalent saving for BA. POCL’s activity-based
costs associated with the paper based mechanism of benefit payment also fall, but not
proportionately as only the variable costs are saved.
Cost of establishing POCL bank
The following costs are involved in establishing POCL bank:
™ Smartcards are assumed and they are considerably more expensive than the magnetic
stripe cards, which would be used for the BPC in option A ( POCL has estimated the
cost to be £65m NPV).
= Account setup costs will be borne by POCL directly.
= POCL will be paying Pathway for the Card Management System and for benefit
account transactions. The unit costs of such transactions are similar to those of benefit
payments in option A, but in option A these costs were paid by BA.
™ New activity based costs will be incurred associated with the benefit account
transactions, and these costs more than offset the activity based costs saved for
benefit transactions in 5.2.6.1. It is assumed that the activity based cost of performing
a banking transaction is equivalent to that of performing a paper-based benefit
transaction.
@ As discussed above, ICL’s bank operating costs will be passed on to POCL.
Financial results
Scenarios
We asked the parties to model three variants of option BI:
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@ Option B1 Core - This scenario was based on availability of the benefit account from
July 2002, as agreed between POCL and ICL in their draft Heads of Terms for option
BI, and on POCL’s assumptions on the rate of takeup of, and attrition from, the
benefit account.
@ Option B1 Sep 01 - This scenario assumed that the benefit account could be made
available nine months earlier than in the core scenario: at the end of September 2001.
The core assumptions on takeup and attrition were used.
@ Option BI High - There was a concer that the assumptions on takeup and attrition
rates were conservative, and that higher takeup and lower attrition could be achieved
if the benefit account were correctly positioned. This scenario assumed an availability
date of July 2002 but with higher takeup and lower attrition than the core scenario,
resulted in transaction volumes comparable to the BPC.
Further detail of the assumptions used is given in appendix 1.
Financial results
Option BI Core
The table below summarises the financial results for option B1 Core, and the NPV
movements from option A to option B1 Core (favourable movements are shown as
positive numbers and adverse movements as negative numbers). As before, detailed
cashflows are presented in appendix 3.
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(Option Bi Core, plus BI Core as compared to option A imNPV £m NPV]
B1 Core v option A
Fav/(adv)I
BA
Payments to Pathway (73) 358)
ACT costs, including contingency (456) (224)
Cost of the "unbanked" - 70)
CAPS savings 606 (275)
POU savings 16 10)
Payments to POCL saved 1,243 729
BA net administrative savings 1,337 669)
IBA programme savings 918 13
BA net administrative savings and programme savings 2,254 682]
IPOCL
(Capital costs and non recurring revenue costs (147) (21)
IBA & girocheque income (1,410) (696)
IBA/SSA & girocheque related ABC costs 115 246]
\Cost of smarteards (65) (65)I
\Card Management Service (CMS) (67) (57)I
IAccount setup (43) 43)
Systems charges for POCL banking (124) (124)
POCL banking ABC costs (269) (269)
IPOCL banking fraud costs (104) (104)
Network banking income 366 (90)
Network banking ABC costs (256) 63
INetwork banking systems charges (86) 25
Cost of new banking technology - +
Other POCL contribution 172 +
Other systems charges @71) @
[Loss in other POCL contribution - footfall impact (40) I
Other POCL net costs 88 @)
Subsidy: retail impact subpostmasters - -
POCL net impact on profits (1,630) (1,146)I
[Sub total impact on the Public Sector 624 (465)
ICL funding gap (ie ICL's NPV excluding £126m) (439) (403)
ITotal cashflow impact on Public Sector 185 (868)
[Less ICL termination payment in baseline 150 +
[Total NPV impact on Public Sector 335, (868)
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Notes
The ICL funding gap includes a cost of £12im NPV for banking operations. The
majority of the remainder of the gep is attributable to loss of revenue, with less than
£50m being attributable to increased costs for the BI Core.
Options BI Sep 01 and B1High
The table below shows the NPV movements of options BI Sep 01 and BI High relative
to option A, and also includes option BI core again to aid comparison.
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[BI scenarios relative to option A, fav(adv) imNPV EmNPV Em NPV I
BI Core BI Sep01_ BI High
vA vA vA 1
BA
[Payments to Pathway 358 372 358
IACT costs, including contingency (224) 303) (224) I
[Cost of the "unbanked" 70 70 70
CAPS savings (275) (192)_—(275) I
POU savings 10 14 10]
Payments to POCL saved 729 974 729I
IBA net administrative savings 60 936 669 I
IBA programme savings 13 49 13
IBA net administrative savings and programme savings 682 585 682] I
POCL
(Capital costs and non recurring revenue costs @Q) =@t a
IBA & girocheque income (696) (904) (696) i
BA/SSA & girocheque related ABC costs 246 255 246I
Cost of smarteards (65) — (72)_—s (10)
ICard Management Service (CMS) 67) (63) I
[Account setup (43) (45) S)
‘Systems charges for POCL banking (124) (137) (215) I
POCL banking ABC costs (269) (294) (480)
POCL banking fraud costs (lod) (121) (154)
INetwork banking income (90) (86) _—(120)I I
INetwork banking ABC costs 63 62 84
Network banking systems charges 25 2s 32
Cost of new banking technology - - - I
Other POCL contribution - : -
Other systems charges 4) @) (4)
Loss in other POCL contribution - footfall impact @) G) ul I
Other POCL net costs 3) (12) 3)
Subsidy: retail impact subpostmasters - : ;
POCL net impact on profits (146) (1,420) (1,585) I
[Sub total impact on the Public Sector (465) (435) (903) I
ICL funding gap (ie ICL's NPV excluding £126m) (403) @59)_(279)
Total cashflow impact on Public Sector (868) (794) (1,182)
[Less ICL termination payment in baseline - - + I
[Total NPV impact on Public Sector (868) (794) _ (4,182)
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Potential Additional Costs
Subsequent to the modelling reported above, a number of additional costs were identified
by BA. Further work would be required fully to validate these costs and they have
therefore not been included in the modelling. However, a summary of their indicative
NPV impact on the BI core case is given in the table below.
item [Impact £m IComments
INPV on BL
Core
BA Cost of migration (12)ICost to the BA of issuing letters to advise
claimants of the change (estimated by BA at
£1 per letter)
[Cost of the "unbankables”™ (i37)ICost to the BA of supporting those claimants
who refuse to open a benefit account or a bank
account and therefore cannot be paid by ACT
(Quarterly statements (Sd)IEstimate of the cost (40p per statement) which
would be incurred if it were necessary to issue
quarterly statements in accordance with the
Banking Code (5.2.2.4 refers).
Interpretation of results
The table below summarises the way in which different aspects of option BI have
contributed to the overall movement. A detailed discussion of each of the movements is
presented in appendix 4.
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[Summary of NPV movements from option A to option Bi Core, £m
BA POCL ICL Total}
[Impact of cancelling BPC and accelerating ACT
[Payments to Pathway for BPC services 358 (358) 0
[Payments from BA to POCL 729 (696) 33
ACT costs (224) (224)
Savings foregone through automation delay (265) (265)
[Estimated variable costs saved from cancelling BPC 150150)
IABC costs for orderbooks and girocheques 246 246
\Subtotal 399 (450) (208) (59)
impact of POCL Bank
Smart card (65) (65)
ICard Management Services (67) 57 0
Account setup (43) (43)
Payments to Pathway (124) 124 0
POCL bank ABC costs (269) (269)
ICL bank operating costs (121) (121)
[Additional ICL costs (based on net capex/opex 42m) (192) (192)
Cost of "unbanked" saved 70 70
[Subtotal 70 (558) (132) (620)
Other effects
ICL funding gap (excl effects above) (62) 2)
Net impact on fraud’? 13 (104) (92)I
Mise (4) G4)
[Subtotal 13 (39) (62) (188)
Total 682_(1,146) (403) _ (868)
Because ICL has a high fixed cost base, it is necessary to replace a significant proportion
of the revenue lost from the cancellation of the BPC in order to return ICL to its former
position of a £126m NPV loss. This more than offsets the savings to the public sector to
be gained from the cancellation of BPC and the acceleration of ACT. In effect, the public
sector is still paying for the BPC. In addition, the public sector is paying for the setting
up and operation of the BPC’s replacement: the benefit account. It can be seen from the
table that the new costs associated with this are considerable.
"© As discussed at 5.2.3, we would not expect a significant increase in fraud costs given that the
principal effect of B1 is to transfer existing costs and risks from BA to POCL. The net impact on
fraud may therefore be overstated, reflecting the indicative nature of the estimates of POCL bank
fraud costs.
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The modelling of B1 Sep01 indicates that an acceleration of the option B1 development
would only slightly improve the situation for the public sector. This is because the
benefit to be gained by bringing forward BA administrative and programme savings is
largely offset by the bringing forward of ACT and benefit account costs.
The modelling of B1 High indicates that the supporting of a large number of benefit
accounts would represent a significant cost for the public sector. This reflects the fact
that there would be no (modelled) cost savings or income offsetting the increase in
variable costs. Note, however, that the model does not include Electronic Government
income, which might be increased if the population of benefit account smartcard holders
were greater.
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6 Option B2
6.1 Description of B2
6.1.1 Principles
6.1.1.1 In Option B2, the purpose and functionality of benefit accounts would be the same as in
Option B1. However, rather than being operated by ICL, the accounts would be operated
by a number of banks with whom POCL would contract.
6.1.1.2. The counter application used to handle benefit account transactions would continue to be
hosted on Horizon. A high-capacity interface, known as the “banking hub” would be
required to link Horizon to the systems of the banks operating the benefit accounts.
6.1.1.3 In discussions of Option B2, it was assumed that ICL would carry out management of the
benefit account smartcard, as under B1. However, it would also be possible for card
management to be carried out by the banks.
6.1.1.4 POCL’s view is that of the order of five banks would be involved in operating benefit
accounts. The principal drivers for this figure are the lack of presence of English banks
in Scotland and Northern Ireland, and the extent of spare capacity in banks’ IS/IT.
6.1.2 Difference in commercial implications for POCL compared with BL
Network banking
6.1.2.1 There is likely to be a strong linkage between the negotiations for benefit accounts and
network banking. This is because:
@ It has been assumed that POCL would pay banks to operate benefit accounts but that
banks would pay POCL for network banking transactions. If the agreements with a
particular bank reflected this assumption, the bank would be disincentivised from
facilitating the migration of customers away from benefit accounts and into network
bank accounts, thereby compromising the network banking strategy. This potential
conflict of objectives could potentially be addressed by negotiating the two elements
as a “package”.
= Banks operating benefit accounts will potentially benefit from the customer
information and sales opportunities which the account could offer. This may enable
POCL to obtain lower charges for the operation of the benefit but may also prejudice
future network banking opportunities (eg by requiring a measure of exclusivity).
6.1.2.2 As POCL and its partner banks will be well-positioned to migrate customers from the
benefit account to a partner bank account, POCL may well be able to increase its
network banking revenue.
6.1.2.3 However, due to the linkage between benefit accounts and network banking Option B2
may place negotiations on network banking on the critical path for the achievement of
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public sector savings from the automation of benefit payments. There is thus a risk that
because of the consequent urgency of the negotiations, POCL might be pressured into
entering into agreements which would be inappropriate in the longer term.
Electronic government
One of the objectives of option B1/B2 is to provide POCL with a competitive advantage
in the emerging electronic government market. However, banks are potential competitors
in this market. There is thus a possibility that the negotiations with banks might be
extended to cover electronic government aspects (eg branding of the card, use of the card
at banks for electronic government transactions). This could increase the complexity -
and hence duration - of the negotiations.
Again, it should be noted that the impact of electronic government has been excluded
from the modelling of all options.
Differences in technical and operational impact compared with option BI
Horizon infrastructure
Option B2 has a more significant impact on the development, implementation and
operation of the Horizon infrastructure than does option B1. The table below summarises
the difference in costs between option B2 and option Bl, as set out in the costing
information prepared by ICL as input to the PA review", As in the case of option BI, the
table shows net effects and such aspects as redeployment of headcount are excluded from
these estimates. We have assessed the potential variance where there are significant
uncertainties relating to the costs.
Impact of B2 on ICL as compared to option A
Ttem ICL Discussion of Derivation Estimated
Estimate Variance
(ém) m)
DEVELOPMENT AND IMPLEMENTATION ONE-OFF COSTS
Process definition 3 ‘A new cost covering the agreement of operating
processes with each of the five banks.
Software development I (3) ‘Although it would not be necessary to develop an I -5to+30
and test account system ~ hence the reduction in costs = it
would be necessary to modify the card management
system and carry out end-to-end testing with each of
the banks. Given that the requirement has not been
defined, a project plan has not been drafted, and the
programme risk arising from the number of banking
partners, this estimate is subject to significant
uncertainty.
‘Setup costs of online 14 Tthas been assumed that some post offices would
communications require Frame Relay rather than ISDN because of
increased transaction volumes.
“Report to HMT on Option B for BA/POCL Automation Project, PA Consulting, 9 April 1999
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‘Impact of B2 on ICL as compared to option A
Item Ich Discussion of Derivation Estimated
Estimate Variance
(my Gm)
Banking Hub 30 This estimate has been based on a very limited -10to+ 10
analysis and is therefore subject to a wide margin of
error. Note that this estimate from ICL was increased
by £5m from that provided to PA, following further
analysis by ICL.
Contingency 8 ‘Additional contingency.
TOTAL Tnerease over Bl = £29m to £92m with a best estimate of 52m one-off cost
STEADY STATE PER ANNUM OPERATING COST (Peak Universal Banking Population)
Contractual boundary T "Management of the relationships with the five banks.
management
Data centre operating 7 ‘Operation of online processes interacting with other I down to-3
costs: banks. This figure assumes online notification of
lost/stolen card stops to banks’ systems. Depending
on design, this element of complexity may be
eliminated.
Reconciliation 5 Suppor for reconciliation with the five banks,
Online communications 16 Frame Relay rental.
Hub operating costs 3.5 Indicative estimate, subject to significant uncertainty. I -2 to +2
Contingency 6 “Additional contingency.
Total £32.5m to £39.5m per annum additional to BL
Bank account operation
We would expect the costs of account operation to be broadly comparable between
options BI and B2 and assume that POCL would seek to optimise the balance between
economies of scale and exploitation of spare capacity in its selection of, and negotiations
with, partner banks.
Differences in timescale compared with option BI
We would expect the development of option B2 to take longer than that of BI. This is for
the following reasons:
= While negotiations for option BI have already progressed to draft heads of
agreement, option B2 would require identification of, and negotiation with, a number
of partner banks. This would delay specification of the changes required to Horizon,
particularly given the complexity of the negotiations discussed at 6.1.2.
1m The development programme is more complex than that for option B1 because of the
need to develop additional operating procedures and the systems to support them, to
specify and develop the banking hub and to carry out end-to-end testing with all the
partner banks.
Financial impact compared with option BI
Although some modelling of option B2 was carried out at an early stage by the parties, a
decision was made by the parties to focus on option BI and not carry B2 forward.
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Consequently, we do not have financial projections for B2 based on a common set of
assumptions comparable with B1.
We would expect option B2 to have an adverse impact on the public sector as compared
with option B1. Significant elements of the effect would include:
= BA savings would be impacted if the implementation of benefit accounts were
delayed compared with option BI. As a guide to the impact, the nine-month delay in
ACT migration between scenarios BI and B1Sep 01 has an adverse impact on BA of
approximately £300m NPV (of which around £240m represents payments to POCL
not avoided, and is therefore a transfer within the public sector).
= The increase in Horizon costs would have a significant impact which previous ICL
modelling suggests would be in the range £150m-200m NPV.
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Option B3
Description of B3
Principles
In option B3, the BPC would be cancelled as in option BI. As in B1, development and
implementation of the core Horizon infrastructure and OBCS would continue.
Rather than establishing benefit accounts, POCL would put in place mechanisms which
would allow it to pay benefits in cash from ordinary bank accounts over post office
counters.
Once a cash payment mechanism was available, BA would begin migration to ACT.
Compulsory ACT migration would be over the two years 2003/4 and 2004/5, timed to
complete before expiry of the BA contract with ICL for OBCS, in May 2005. Optionally,
the compulsory migration period could be preceded by a period of voluntary migration,
beginning around June 2001, during which ACT would be heavily promoted.
BA expects that there would remain a small proportion of claimants (assumed by BA to
be 15%) for whom ACT was infeasible, at least initially. BA would contract a “New
Service Provider” to provide a payment service for these claimants. It is possible that
POCL/ICL might win the contract to be the New Service Provider.
‘There are no smartcards assumed in the modelling of option B3.
Cash payment mechanism and implications for timing
_ Network banking
In the longer term, POCL’s network banking strategy offers a potential solution to the
problem of paying benefits in cash from customers” bank accounts, However, there is a
timing issue - will network banking be sufficiently firmly established before the
migration to ACT needs to begin?
In our previous work on termination options, we estimated the following timescales for
the development of network banking over the Horizon infrastructure:
= development: 6-9 months;
& testing and live trial: 6-12 months (with a further 6 months if a pilot were required);
@ rollout: 15 months (could possibly be reduced to 12 months if no PIN pads required;
other timescale drivers are staff training and the rate at which banks/LINK ,would
accept connections). -
To this total must be added the time required to establish the network banking
requirement in consultation with banks and/or LINK. Our view is that 12 months should
be allowed for this, giving a total timescale of 36-48 months.
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It is consequently unlikely that network banking could be made available over the
Horizon infrastructure (other than perhaps for a pilot) until 2002/3.
These estimates of timing are closely aligned with POCL’s forecasts of the growth of
network banking used in the modelling of options A and B1. In 2001/2, POCL’s forecast
of network banking “market share” (the proportion of current accounts which can be
accessed via network banking) is only 9% (representing a pilot project). This rises to
around 25% by 2003/4 and around 45% by 2005/6.
There is a possibility that POCL might be able to accelerate the establishment of network
banking, particularly since cancellation of the BPC would allow resources to be focused
on the banking aspect of Horizon, However, other factors would impede such
acceleration. For example, in the absence of the BPC, POCL’s automation technology -
which is critical to the acceptability of the network banking proposition to banks - will
remain unproven.
In summary, it would be prudent to assume that if network banking as currently planned
is to form the basis of benefit payments, ACT migration should be delayed until the start
2003/4 (if payment via post offices is required).
This is consistent with B3 provided that the compulsory migration period is not preceded
by a period of heavily-promoted voluntary migration. However, if there is to be such a
period, it is likely that an alternative cash payment mechanism would be required. A
possible approach is outlined below.
Cash advance via Merchant Acquirer
The alternative approach involves POCL providing cash advances against debit cards
(comparable to the “cashback” service offered by supermarkets) by means of EFTPOS.
This would involve POCL establishing a relationship with a Merchant Acquirer. In
contrast to the network banking proposition - which is novel - this option has the
advantage that there are well-established standards for technical and procedural
relationships.
However, a number of issues would need to be addressed. Firstly, a change to APACS
rules would be required in order to allow cash advances against debit cards. (Current
rules prevent the provision of “cashback” unless a purchase is made.)
Secondly, the commercial basis for cash advances against debit cards would need to be
agreed. Retailers normally pay the Merchant Acquirer commission on each transaction, a
portion of which is passed on to the Card Issuer by the Merchant Acquirer. A
straightforward continuation of this paradigm would result in POCL paying its Merchant
Acquirer a fee (possibly in the range 4.5p - 8p") for each cash advance.
This would both represent an additional cost for POCL and, potentially, create a conflict
of objectives between POCL and the banks which would impede the development of the
network banking strategy - a move to network banking would change the commercial
" Source: informal discussions with a Merchant Acquirer during October 1998
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relationship from one in which banks were paid commission on cash advances to one in
which they had to pay POCL.
It is, however, possible that the Merchant Acquirer would be able to negotiate the
payment of commission by Card Issuers for cash advance transactions and that POCL
would be able to negotiate a share of this commission. This possibility is suggested by
the following precedents:
@ The cash advance service is functionally equivalent to a “foreign” ATM transaction.
It is established practice for the Card Issuer to pay commission of around 50p for such
transactions.
u The proposed debit card cash advance would be analogous to a credit card cash
advance. Card Issuers currently pay Merchant Acquirers a commission on credit card
cash advances at the International Credit Card Reimbursement Rate (around 1% Of
the transaction value).
For the purposes of modelling, we have prudently assumed that such a commission
would not be negotiated and that POCL would therefore pay Merchant Acquirer fees.
Timescale for cash advance facilities
We have not discussed the timescales for EFTPOS to support cash advances with ICL.
However, timescales are likely to be shorter than those for network banking, for the
following reasons:
a negotiations with banks on technical requirements would not be required -
development could proceed in parallel with commercial negotiations;
m development and testing are likely to be more rapid because only one bank (the
Acquirer) is involved and the technical and procedural interfaces are well-understood;
™ there may be fewer constraints on the rate at which offices can be brought on line,
again because of the standard nature of the interface.
Implications of option B3
Impact on POCL
Impact on POCL strategy
As discussed above, there is a risk that the introduction of an interim cash payment
service based on EFTPOS would impede the development of POCL’s network banking
strategy. It would be important to hold early discussions with banks, in particular
potential Merchant Acquirer partners.
Option B3 may also impact the development of electronic government services.
Although it would provide a technical infrastructure capable of supporting smartcards, it
would provide neither a smartcard-carrying population nor the back-end operation
required to support that population (help desks, card production and distribution, etc). As
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in other options, revenues from electronic government services have not been included.
Smartcard costs have not been included in option B3.
We would observe that banks are moving towards the replacement of magnetic stripe
cards with smartcards and that banks are viewed as potential channels for the delivery of
electronic government services. POCL may wish to consider widening its network
banking (and, if applicable, interim cash payment) negotiations to embrace the
possibility of collaboration with banks in the delivery of electronic government services.
Network size and footfall
Although our modelling of option B3 was carried out in isolation from POCL, we have
used assumptions for network size and impact of footfall loss broadly comparable with
those used by POCL for the modelling of option C. These are discussed at 8.1.3.
Impact on ICL
Impact on ICL cost base
In our modelling, we have assumed a reduction in ICL’s costs of £150m. This
assumption is based on information provided by ICL, in the course of our October 1998
work on fallback options, on the impact of cancelling the BPC. The estimate is consistent
with the change in ICL’s revenue and our understanding of ICL’s ratio of fixed to
variable costs. However, since the estimate for the purposes of this work has been
derived in isolation from ICL, it must be considered to bear a significant margin of error.
It should be noted that the modelling of ICL’s costs assumes that there is not a major
hiatus in the project such as might result from terminating the current agreement prior to
opening negotiations over B3. It is likely that additional costs would be incurred in
restarting the project following any such hiatus.
ICL’s net NPV position
. The modelling of option B3 assumed that ICL will still be prepared to absorb a loss of
£126m NPV. However, it was recognised at the time of the modelling that this might not
be acceptable to them under this option. In particular, because this option does not
involve the creation of a smartcard-carrying population, ICL may perceive the potential
of “Golden Cloud” to be lower.
Subsequent to the value for money analysis, KPMG staff assisted HM Treasury in
calculating the impact on cashflows of the price elements of the offers discussed during
negotiations with ICL over option B3. The last offer for which such calculations were
performed is set out at appendix 6.
Impact on BA
As in the case of option B1, B3 has impacts on the timing of ACT costs and automation-
related savings. The impact of B3 is adverse compared with B1 because ACT migration
completes later.
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In addition, this option involves new costs for the New Service Provider. The costs
associated with the New Service Provider have been modelled by BA and assume a
payment of 60p per transaction for the 15% of benefit recipients who will not be able to
take up ACT initially. (It is assumed that in future years most will indeed migrate to
ACT)
Financial results
Scenarios
The paragraphs below define the scenarios modelled and key assumptions employed.
Further detail of assumptions is given at Appendix 1.
Scenario definitions
We defined the following scenarios:
= With Marketing - Voluntary ACT migration is heavily promoted in the period July
2001 to April 2003. Compulsory ACT migration takes place over the two years
2003/4 and 2004/5. This variant requires the deployment of an interim cash payment
service based on EFTPOS. It is assumed that this would be delivered over the Horizon
platform.
Without Marketing - Compulsory ACT migration takes place over the two years
2003/4 and 2004/5 without prior marketing of voluntary ACT.
Interim cash payment service
In the With Marketing scenario, we have assumed the provision of an interim cash
payment service based on EFTPOS, in line with the conclusion above that Network
Banking would not be in place in time for the voluntary migration period.” It is assumed
that POCL will have to pay the Merchant Acquirer for these transactions.
We have assumed that the interim cash payment service would be heavily promoted so as
to maintain footfall in advance of network banking. Costings therefore assume that all
migrated benefit claimants would continue using the post office for cash withdrawals via
the interim service (which, being based on EFTPOS, would support all accounts with
debit card facilities). °
There is a risk that the volumes may be overstated as some customers may well change
their behaviour as a result of ACT migration, moving to the use of cash withdrawal
channels other than POCL. As a guide to the impact of this assumption, a reduction by
50% in interim cash withdrawal transactions would reduce banking costs by an amount
of the order of £20m NPY (although this would be offset to some extent by an adverse
impact on footfall).
® Notwithstanding the uncertainty surrounding the introduction of network banking prior to
2003/4, we have retained the non-benefit-payment-related network banking costs and revenues
prior to 2003/4 which were included in other options to aid comparability. As an indication of the
effect of this, the total net impact on POCL contribution of these is of the order of only £1m NPV.
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Once network banking becomes established in 2003/4, we have assumed that POCL
would actively encourage non-network-bank customers to stop using the service and to
switch to network banking instead, eg by beginning to levy transaction charges for cash
advances over EFTPOS.
New Service Provider
We conservatively have assumed that POCL would not win the BA tender for a “new
service provider” for those claimants not migrating to ACT. If POCL were to win this
tender, we estimate it would improve its NPV contribution by around £100m.
Derivation of models
The B3 With Marketing scenario was modelled as follows:
@ The impact on BA was modelled by BA.
@ The impact on POCL was estimated by KPMG in isolation from POCL and was based
on POCL’s modelling of other options, taking into account the appropriate phasing of
ACT.
m The impact on ICL was estimated in isolation from ICL, drawing heavily on an
assessment, provided by ICL in October 1998, of the impact of cancelling the BPC
element of Horizon.
Initially, the B3 No Marketing scenario was modelled in the same way as the With
Marketing scenario. On reviewing the models, the public sector parties took the view that
B3 No Marketing was preferable to B3 With Marketing. Consequently, further analysis
and modelling were carried out by both POCL and BA. The model presented herein
reflects the results of that analysis and was derived as follows:
= The impact on BA was re-modelled by BA. KPMG made a number of adjustments -
in consultation with BA - to this modelling in order to ensure comparability of
assumptions between options. These adjustments were as follows:
- BA’s model did not include ACT contingency costs for the years 2007/8 to
2009/10. KPMG added contingency cost to these years in line with that modelled
by BA for previous years (£10m pa).
- BA’s model included ESNS" savings of £4m pa from 2001/2 to 2004/5. These
savings were not assumed in the modelling of option Cx, which has the same ACT
migration pattern. For prudence and comparability, we have excluded these
savings.
- BA’s model assumed that the fixed fee element of payments to POCL did not
continue during ACT migration, whereas in option Cx, it was assumed that the
fixed fee element would continue. For comparability, KPMG assumed payments to
POCL based on those modelled by BA for option Cx. However, the annual
“4 Electronic Stop Notice Service - an existing electronic system for controlling fraudulent use of
lost and stolen order books. This is currently deployed within the London area only. The
capability is to be deployed throughout mainland UK, either over the Horizon infrastructure or,
were Horizon to be cancelled, over an alternative platform.
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payment to POCL avoided once ACT migration was complete was limited to
£351m, this being the annual payment to POCL assumed in the baseline for the
relevant years.
= The modelling of the impact on POCL was based on modelling carried out by POCL.
KPMG adjusted the technology costs modelled by POCL; a discussion of the
adjustments is provided below.
m= The impact on ICL was estimated on the basis used for the model of B3 With
Marketing.
POCL technology costs for option B3 No Marketing
ICL’s proposal for option B3 covers only the period up to the end of 2004/5. POCL
assumed in its modelling that, at the end of this period, it would contract for the
development of a new service completely replacing Horizon. Consequently POCL had
modelled the costs for the development of an entirely new service, using the costs
assumed in option C and option Cx for such a development.
KPMG proposed an alternative “do minimum” assumption: that at the end of 2004/5,
ICL would be contracted to continue to operate the Horizon infrastructure, carrying out
the level of technology refreshment which would have been carried out under option A.
Although there may be advantages to POCL in contracting for a new service, we would
expect that an approach other than the “do minimum” would be required to yield
additional benefits sufficient to offset its additional costs. The “do minimum”
assumption could therefore be seen as representing a “worst case”.
POCL raised two concerns relating to the use of the “do minimum” assumption:
@ POCL would not wish it to be inferred that it was willing to enter into any agreement
now with ICL for the period beyond 2004/5.
& POCL is concerned that it might not be in a position to contract another party to
refresh and operate the Horizon system at a price comparable to that which it is
assumed would be charged by ICL, and might therefore be unable to exercise
competitive pressure on ICL. ICL might therefore seek to charge a price for
refreshing and operating Horizon significantly in excess of that currently estimated.
POCL’s concerns in this area relate to issues such as IPR and software support.
Following discussion with HM Treasury, it was agreed that the “do minimum”
assumption should be used for modelling purposes. Nonetheless, the concern expressed
by POCL over its position to exercise competitive pressure on ICL at the end of the
initial contract represents a real risk.
If the risk were to mature, and POCL were to contract for an entirely new infrastructure,
the adverse impact, based on POCL’s modelling, would be in the range £260m NPV
(assuming an ISDN-based communication architecture as assumed across this value for
money analysis) and £409m NPY (if a fully online network were employed, as assumed
by POCL).
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We strongly recommend that, prior to any final agreement with ICL, POCL satisfy itself
that it will be in a position to take over the Horizon infrastructure so that it can readily
contract a third party to refresh and maintain it, Issues to be explored in the negotiation
will include IPR, ownership of assets, and software and hardware support.
Modelling of the “do minimum” assumption
We took the following approach to the modelling of the “do minimum” assumption:
The costs of technology refreshment and operation were estimated based on the high-
level (published) ICL costs for other options.
= A 15% margin was added, as it was assumed that ICL would seek to negotiate any
new contract on a profitable basis.
Financial Results
The table below shows the summarises the financial results for the two variants of option
B3, with and without marketing of ACT prior to 2003/04.
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Option B3 with and without marketing £mNPV £m NPV]
B3 mktg B3 no mktgI
BA
Payments to Pathway (66) (84)
IACT costs, including contingency (515) (387)
Cost of the "unbanked" (204) (174)!
CAPS savings 584 505
POU savings 16 13
[Payments to POCL saved 1,433 1,179)
BA net administrative savings 1,248 1,052,
IBA programme savings 933 874]
IBA net administrative savings and programme savings 2,181 1,926]
IPOCL
Capital costs and non recurring revenue costs (148) (148)I
BA & girocheque income (1,561) (1.295)
IBA/SSA & girocheque related ABC costs 821 627
POCL bank costs: smart cards, opening accounts etc - +
INetwork banking income 411 432)
INetwork banking ABC costs (288) (301)
INetwork banking systems charges (99) (104)I
Cost of new banking technology (49) +
Other POCL contribution 172 172)
Other systems charges (368) (368)
Loss in other POCL contribution - footfall impact G7) (52)I
Other POCL net costs 138 105
Subsidy: retail impact subpostmasters (137) (121)
POCL net impact on profits (1,145) (1,052)
Sub.total impact on the Public Sector 1,035 875
ICL funding gap (ie ICL's NPV excluding £126m) (340) (316)
Total cashflow impact on Public Sector 695 559)
\Less ICL termination payment in baseline 150 150}
ITotal NPV impact on Public Sector 845 709)
Interpretation of results
The table below summarises the way in which the different aspects of B3 have
contributed to the overall movement of NPV as compared to option B1 core (NB not
option A).
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(Variance compared to Bi core £m NPV
Impact of accelerating or delaying ACT
BA payments to POCL
BA administrative savings
BA programme savings
Paper based ABC costs for POCL
Payments for OBCS (or equivalent from alternative supplier)
Sub total
INew benefit payment mechanism
‘Smart cards
Card Management Services (CMS)
Account setup
Account running costs
IPOCL bank systems charges
"New Service Provider"/cost of the unbanked
IPOCL banking ABC costs
POCL bank fraud costs
Subsidy: retail impact on subpostmasters
‘Sub total
Automation technology
INew banking technology (including interim solution)
IOther systems charges saved
ICL funding gap (excl account running costs in B1)
Sub total
IOther
\Total
B3 mktg B3 no mktgI
38
(81)
105
34
65
37
43
121
124
(204)
269
104
(137)
442
(49)
(10)
(22)
(81)
65
510
51
(6)
(43)
(88)I
av
27)
65I
37]
43
121
124]
(174)
269
104
ai2n)
488
as)
(13)
26I
374
73.4.2 As illustrated above, the main reason that option B3 is significantly less expensive than
option BI is because the costs of establishing POCL bank as the mechanism for paying
73.43
73.4.4
benefits are avoided.
The cost of the core infrastructure is largely unchanged. The cost of the interim solution
in option B3 With Marketing is arguably attributable to the new benefit payment
mechanism as it is required to enable benefit recipients to withdraw cash from Post
Offices, but is has been included as a cost of the automation technology on.the basis that
it is a means to retain footfall prior to the availability of network banking.
Option B3 With Marketing benefits from ACT migration beginning one year earlier than
in option B1. Similarly, B3 Without Marketing is adversely impacted by delayed ACT
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migration as compared to option Bl. Note, however, that in both cases there is a
(smaller) compensating footfall effect.
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Option C
Description of option C
Introduction
Under option C, the contract with ICL would be terminated. A date would be set for
compulsory ACT migration. It would be necessary to:
@ identify an alternative means of allowing benefit recipients to withdraw benefits in
cash from post offices;
™ procure an alternative automation infrastructure for POCL which would support the
benefit payment mechanism and a platform for the development of other services.
Benefit payment mechanism
As in the case of option B3 (see 7.1.2), two benefit payment mechanisms have been
identified: network banking and cash advance. The timescales for availability of the
mechanisms, however, differ between options B3 and C.
Network banking
The procurement and development time for the replacement automation platform are
likely to be the critical timescale driver for network banking in option C. Our work on
the termination option in October 1998 estimated that 39 months would be required from
award of contract to the rollout of a replacement automation platform. To this period, it
is necessary to add the time required for requirements analysis and procurement,
previously estimated at a minimum of 24 months.
Consequently, if the project to implement a new automation platform incorporating
network banking were begun now, it is reasonable to assume that implementation would
not complete until 2004/5,
It is possible that these timescales might be reduced by concentrating purely on the
network banking requirement. However, this could delay the realisation of other
automation benefits for POCL, and possibly place those benefits at risk (eg if a platform
attuned to banking but poorly suited to other POCL requirements was procured in order
to meet the accelerated timescales).
Cash advance via Merchant Acquirer
Two approaches could be adopted towards the EFTPOS functionality required.
Firstly, a dedicated infrastructure could be deployed solely to support EFTPOS. This
would be based on standard off-the-shelf debit terminals. This was the approach
envisaged in the original work carried out on fallback options in October 1998. That
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analysis suggests that, if the project were to start now, a debit terminal infrastructure
could be made available during 2001/2.
Alternatively EFTPOS could be provided by a new automation platform supporting
electronic point of sale and other POCL automation requirements. It is likely that an
early release of the new automation platform, specifically focused on meeting the
EFTPOS requirement, would be required.
As in the case of network banking, there is a risk that acceleration of this one component
of the programme could jeopardise the realisation of other benefits. However, the overall
risk associated with accelerating EFTPOS rather than network banking is likely to be
lower since the former is a well-understood standard mechanism while the latter is an
innovative proposition.
Even given such acceleration of the development, we believe it unlikely that the initial
release could be made available in significantly less than two years from the award of a
contract, ie during 2003/4, unless procurement could be accelerated. This is principally
due to the time required for rollout.
Impact on POCL strategy
The implications of option C for POCL’s network banking and electronic government
strategies are similar to those of option B3. However, the extent of the impact is likely to
be greater because the introduction of an automation infrastructure for POCL would be
further delayed.
The approach taken to the modelling of other impacts on POCL is discussed at 8.2.2
below.
Financial results
Scenarios
Two variants of option C were modelled: C and Cx. The only difference between the two
options was that option C assumed ACT migration beginning in 2001/02 whereas option
Cx assumed ACT migration beginning in 2003/4. Both scenarios assumed that migration
would take place over two years, evenly spread. It should be noted that option Cx is
therefore directly comparable with option B3 with respect to ACT migration.
Derivation of POCL projections
The POCL projections were derived from new modelling by POCL. The paragraphs
below present our comments on the modelling and describe the adjustments made by
KPMG. .
Benefit payment mechanism
In carrying out its modelling, POCL assumed:
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@ that network banking would be employed as the cash payment mechanism;
™ that network banking market share would be same as in option A. Consequently, in
scenario C, only 9% of customers migrating to ACT in 2001/2 would have access to
network banking facilities and therefore continue to withdraw cash at post offices.
However, based on the analysis at 8.1, we have assumed that both scenarios - and in
particular scenario C - would initially require a cash payment mechanism based on cash
advance rather than network banking. Scenario C would require the implementation of
an interim solution (eg debit terminals) while scenario Cx could possibly be supported by
an accelerated initial release of the new automation platform (were this more cost-
effective than an interim solution).
In order to reflect this, the modelling of options C and Cx was adjusted to include the
costs associated with interim cash payment from the start of ACT migration to 2004/5.
Network banking and interim cash payment transaction volumes consistent with those
used in the modelling of option B3 were employed.
Cost of new automation platform
The following adjustments were made to the POCL estimates of the cost of a new
automation platform:
= POCL assumed a fully online network - a significant change of architecture from
option A which provides all the functionality of the replacement including network
banking. This fed to an increase in communications costs of at least £300m NPV. In
line with our general assumption on communications architecture (3.2.4 refers), we
have not included this increase.
@ POCL’s estimates assumed that development of the replacement automation platform
would begin immediately. We have adjusted the profile of costs to reflect an
indicative 1-year period for procurement in advance of development. The resulting
delay in development results in a cost reduction of approximately £100m NPV. This
is intended as a conservative adjustment - as discussed above, the period required for
procurement may be greater.
We would emphasise that the POCL estimates were presented as indicative estimates
only, and that considerable further specification and planning work would be required to
produce refined estimates. It should also be noted that the POCL estimates were based on
an “in-house” development and that potential benefits from economies of scale which
could be brought by the private sector have not been factored in.
Impact on network
POCL’s modelling of the impact of options C and Cx does not reflect the risk of
unmanaged closures which may flow from a loss of subpostmaster confidence following
announcement of termination. POCL has assumed, consistently across all options, that
the network size remains the same.
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Impact of loss of footfall on POCL's income
POCL has estimated the impact of loss of footfall on contribution from other POCL
services arising from the reduction in benefit cash payment transaction volumes. We
have not examined the calculation of this loss of contribution but it is broadly consistent
with the cost of avoiding 6,000 post office closures assumed in the modelling of option 2
in October 1998,
Impact of Loss of footfall on sub-postmasters
We have assumed that a subsidy to sub-postmasters will be required, based on our work
of October 1998. We have estimated this subsidy to amount to £30m pa, which would
ensure that no sub-postmaster lost more than 10-15% of his/her income (which in some
cases could be offset by reductions in variable costs).
ICL termination payment
An estimate of the termination payment to ICL was included. Note that this is not a
KPMG-derived estimate.
Derivation of BA projections
The impact of options C and Cx on BA was modelled by BA.
Financial results
The table below summarises the financial results for options C and Cx.
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Options C and Cx
BA
Payments to Pathway
ACT costs, including contingency
‘Cost of the "unbanked"
CAPS savings
POU savings
Payments to POCL saved
BA net administrative savings
IBA programme savings
[BA net administrative savings and programme savings
IPOCL
\Capital costs and non recurring revenue costs
IBA & girocheque income
IBA/SSA & girocheque related ABC costs
IPOCL bank costs: smart cards, opening accounts ete
INetwork banking income
INetwork banking ABC costs
INetwork banking systems charges
Cost of new banking technology
Other POCL contribution
Other systems charges
‘Loss in other POCL contribution - footfall impact
Other POCL net costs
Subsidy: retail impact subpostmasters
/POCL net impact on profits
Sub total impact on the Public Sector
ICL funding gap (ie ICL's NPV excluding £126m)
‘Total cashflow impact on Public Sector
Less ICL termination payment in baseline
ITotal NPV impact on Public Sector
£mNPV £m NPVI
c CxI
(48) (84)
(515) (83)
(163) (114)
505
13]
1,179]
7,116
874
1,990]
a4) a4)
(1,797) (1,319)
874 655
397 433)
(276) (302)
(980) (898)
172 172)
(76) (54)I
70 90
(157) rebe))
(1,886) (1,447)
734 543)
734 543
734 543
Interpretation of results
The table below summarises the way in which the different aspects of C have contributed
to the overall movement of NPV as compared to option B1 Core. °
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Variance compared to Bi Core £m NPV
c Cx
impact of accelerating or delaying ACT
BA payments to POCL 20 27
IBA administrative savings 54 2)}
BA programme savings 43 (43)
Paper based ABC costs for POCL 159 60)
Payments for OBCS (or equivalent from alternative supplier) 24 ay
Sub total 301 (120)
[New benefit payment mechanism
‘Smart cards 65 65)
Card Management Services (CMS) 57 357
[Account setup 43 43
Account running costs 121 121,
/POCL bank systems charges 124 124)
"New Service Provider"/cost of the unbanked (163) (114)
/POCL banking ABC costs 269 269)
/POCL bank fraud costs 104 104)
Subsidy: retail impact subpostmasters (157) (e885)
Sub total 464 559I
Banking technology
INew banking technology (980) (898)I
IOther systems charges saved 457 457
ICL funding gap (excl account running costs in B1) 168 168
Sub total G35) (CB)
Other (10) 42]
[Total 400 208)
A key saving in option C relative to option B1 is the cost avoided of establishing POCL
bank. These savings are similar to those in option B3.
The cost of the core infrastructure in options C and Cx is considerably higher than in
option B1. This is a result of:
@ the termination payment to [CL assumed in option C and Cx of £150m NPV;
@ the assumption that an alternative supplier of the technology infrastructure will not be
prepared to take a loss of £126 NPV;
the cost of interim cash payment, particularly in option C.
ACT migration in option C begins one year earlier than in option B1 which gives rise to
significant savings; these savings are more pronounced than the savings in option B3
With Marketing where ACT migration took four years (two years voluntary plus two
year compulsory). The adverse impact of delaying ACT migration in option Cx is
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comparable to that in option B3 Without Marketing as the ACT migration period is
similar.
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A) Assumptions underlying modelling of the options
A IA - Delay IB1 core BI high IB1 Sep 01 B3 mktg IB3 no mktg [C cx
‘Summary Current (Current B1.2 with Higher takeup IPOCL bank == {BPC BPC Horizon Horizon
programme* programme; IPOCL bank in Jand lower __ available Sep cancelled; cancelled; cancelled; ACT Icancelled;
BPC slips 6 —IJul 02 and attrition for 01 Horizon rolled IHorizon migration starts IACT
Imonths \POCL takeup IPOCL bank jout; ACT rolled out; {2001/2 migration
lassumptions promoted from IACT not starts
Jun 01 promoted 2003/4
* Current programme assumes: Ne
[Release 2+ September 2000
w Release 2 begi
ins rollout August 1999; the rate of rollout is as
defined in the current programi
me plan (Firebreak), New
people claiming
benefit
Timescales
Infrastructure [As current [Slipped 6 As current programme [Not specified by POCL [Not specified by POCL
rollout programme {months
POCL bank IN/A Start Jul 2002 [End Sep 2001 [N/A INA
lestablished
Blectronie [April 2002 April 2002 April 2002 April 2004
network banking
ACT migration [2005/6 - 2007/8 20:40:40 [2002/3 - 2004/5 36:56:7 ie2 [2001/2 - 200172 - [2003/4- [2001/2 - 2002/3 [200374 -
lyears migration from Jul 02 {2003/4 2004/5 2004/5 50:50 2004/5
[22:57:21 (voluntary first}c50:50 50:50
two years)
{-20:40:20:20
Volumes
BA transaction [Up-to-date volumes provided by BA
volumes.
Number of [24.5m of whom 15.5m currently paid via POCL. Churn = 5% per annum
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A [A-Delay __[Bicore Bi high BiSep01 [B3mktg _[B3 no mktg [C [cx
Summary of IN/A FTakeup on ITakeup on {Takeupon [N/A IN7A
basis for POCL transition transition _Itransition
banking volumes 80%; attrition I100%; attrition I80%; attrition
12% climbing I3% climbing 12% climbing
to 25%; takeupIto 6%; takeup Ito 25%; takeup
for new for new for new
claimants 25% claimants 43% {claimants 25%
ldeclining to declining to _Ideclining to
20% 32% 120%
Summary of
basis for network’
banking volumes
Core network banking
lassumptions based on
McKinsey work. These are
based on a "market share"
profile. The market share
Irepresents the proportion of
banking customers who can
jaccess their accounts via
network banking. 20
transactions per customer per
lyear are assumed.
ICore network banking is as option A.
However, customers moving out of POCL
bank through attrition are treated differently.
It is assumed that availability of network
banking is a neutral factor in determining the
bank to which such customers transfer.
However, where a customer does transfer to a
bank which is a "network bank" at the time of
transfer, they are assumed to carry out an
additional 20 network banking transactions per
lyear so as to maintain their withdrawal pattern,
Core network banking is as option A.
Benefit claimants are assumed to be supported by interim
payment methods until the start of 2003/4 (for options B3)
land until the start of 2004/5 (for options C).
IAt that point, it is assumed that the proportion of benefit
claimants with network bank accounts reflects the network
banking market share. It is assumed that that proportion of
\claimants will continue using POCL as a channel for
benefit payments and that, like “transfers from POCL.
bank” in option B1, they will carry out an additional 20
network banking transactions per year compared with othe:
network banking users.
It is assumed that those customers who are not network
bank customers will cease using POCL as a channel
(because they are assumed to be dissuaded, eg by charges)
lover the course of I year.
r
PO network
Rural attrition (200 closures pa) and 1000 urban closures
Commercial
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A [A-Delay [Bl core [Bi high [BiSep 01 [B3 mktg [B3 no mktg [C [cx
Basis for Pathway scorecard Pathway scorecard with POCL bank Core system: based on POCL estimates for new
Pathway system ltransactions at 46.8 servicepoints and card —_I Pathway scorecard. technology adjusted for:
charges (or cost management at 70 servicepoints per card per consistency in comms costs
of alternative month Interim solution (B3 mktg —_Iassumptions; earliest
technology) only): EFTPOS via Pathway jimplementation 2000/01.
lat 9p per transaction (plus
}6.25p per transaction paid to IInterim solution based on
Merchant Acquirer) \cost of debit terminals per
work in October 1998.
Network bankingI30p per transaction
income
Government Excluded
direct
BA floor [Ends when ACT migration [Ends when ACT migration begins Ends when ACT migration [Ends when ACT migration
payment to lends begins begins
POCL
IBA payment IEnds when ACT migration complete
DSS programme
90% of savings accrue with
100% of savings accrue with ACT
100% of savings accrue with
100% of savings accrue with
savings IBPC, then 100% with ACT ACT ACT
BA costs INet administrative savings and programme savings in baseline and all options based on 1997/98 prices
POCL costs [Exclude intra public sector costs, namely irrecoverable VAT and prefunding costs
Subpostmaster [N/A IN7A £30m pa assumed per work [£30m pa assumed per work
jcompensation in Oct 98 in Oct 98
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B) Illustrative summary of timings of key assumptions
99-00 I 00-01 I 01-02 I 02-03 I 03-04 I 04-05 I 05-06 I 06-07 I 07-08 I 08-09 I 09-10
‘Option A
BPC rolls out
‘ACT migration Pas Te ae
Option A Delay
BPC roils out
ACT migration
‘Option BI (Core)
POCL banking development and rollout
‘ACT migration
Option BI (Sep 01)
POCL banking development and rollout
‘ACT migration
‘Option B3 (Marketing)
Period when interim cash payment in use
Promoted voluntary ACT migration
‘Compulsory ACT migration
‘Option B3 (No Marketing)
‘Compulsory ACT migration
Option C
Period when interim cash payment in use
‘ACT migration
Option Cx
Period when interim cash payment in use
‘ACT migration
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Description of items in cashflows and NPV analyses
Heading
BA
CAPS costs
ITSA costs
Payments to Pathway
ACT costs, including contingency
Cost of the "unbanked"
CAPS savings
POU savings
Payments to POCL saved
BA programme savings
POCL
Capital costs and non recurring revenue costs
BA & girocheque income
BA/SSA & girocheque related ABC costs
Cost of smartcards
Card Management Service (CMS)
Description
Staff and goods & services costs associated with the running of CAPS, largely constant across options
(assumes PDCS, PACS and part of CPCS will continue).
Outsourced IS/IT development and operation costs, largely constant across options
CMS, BES/PAS and OBCS payments (including BES payments passed through POCL)
The steady state cost of around £78m comprises measures to counter increased entitlement fraud risk
(£50m), BACS payments and provision of an alternative mechanism for urgent payments. There are
additional costs associated with initial migration.
The cost of incentivising banks to provide accounts for those currently unbanked.
CAPS savings from the move from paper based payment methods to BPC or ACT. Steady state
savings are around £137m of which around £62m are from the elimination of physical production and
postage and the remainder are from elimination of manual processes.
Costs related to physical storage of foils
Payments for order book and girocheque transactions, including the BA floor payment to POCL in
option A
Encashment fraud savings achieved through move from orderbooks to electronic means of payment
(ACT or BPC)
Principal elements are Horizon refresh costs, PIN pad costs and residual value of Horizon hardware
Income from BA for orderbook and girocheque transactions
POCL's activity-based costs for orderbook and girocheque transactions L.
‘The cost of using smartcards rather than magnetic stripe cards (ICL costs include magstripe savings)
Payments to ICL for management of POCL smartcards under option B1
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Description of items in cashflows and NPV analyses
Heading
Account setup
Systems charges for POCL banking
POCL banking ABC costs
POCL banking fraud costs
Network banking income
Network banking ABC costs
Network banking systems charges
Cost of new banking technology
Other systems charges
Loss in other POCL contribution - footfall impact
Other POCL net costs
Subsidy: retail impact subpostmasters
ICL
ICL funding gap
ICL termination payment estimate
Description
Operations cost of setting up POCL bank accounts in option B1
Payments to ICL for POCL bank transactions in option BL
POCL's activity-based costs for POCL bank transactions
Costs of fraud risk plus fraud investigation in option B1
Payments from banks for network banking transactions, assumed to be 30p per transaction in line with
Corbett assumptions. This is intended to be a conservative assumption; note that previous work on
fallback options in October 1998 assumed income of 50p per transaction.
POCL's activity-based costs for network banking transactions
POCL's payments to ICL for network bank transactions
Indicative costs of Horizon replacement technology under option C
Payments to Pathway for services other than BPC, POCL banking and network banking, eg automated
bill payment
Impact on other POCL services from lower footfall caused by reduction in benefits transactions
handled at post offices
These include income relating to services other than BPC, POCL banking and network banking
supported by Horizon, eg automated bill payment
Cost of compensating subpostmasters for loss of private retail income (assumption as per Oct 98)
Additional payment to ICL required to result in NPV loss of £126M
Estimate of £150m for option C, based on informal discussion with Bird and Bird. This is not a
KPMG-derived estimate.
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Annual cashflows for options
Baseline: "business as usual" - ie continue with paper-based methods of payment and terminate Horizon
BA: from BA’s business case, adjusted to include CAPS and ITSA costs common to all options in the baseline (as agreed with BA)
POCL: from POCL’s automation business case, adjusted to reflect no change in policy (therefore BA income in line with BA's assumption)
BA
CAPS costs (exc! those common to all options)
CABS costs common to all options
ITSA costs common to all options
POU costs
Payments to POCL (incl payments to Girobank)
Total administrative costs
Total programme savings (ESNS/rewards)
POCL
"Avoided costs":
Benefits Agency/SSA/Girobank costs
BAJGirocheques income
Total
ICL
Estimated cost of settlement for termination
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
(137)
(59)
69)
©)
(89)
(630)
52
(244)
389
145
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(137)
35)
36)
(6)
(876)
(590)
52
(238)
376
138
(137)
G4)
(40)
(6)
(370)
(587)
52
(236)
370
134
(137)
(17)
2)
©
(363)
(554)
52
233)
363
130
58
(137)
(7)
Q7)
(6)
(357)
(543)
52
31)
357
126
(37)
(16)
7)
(6)
51)
(537)
52
(228)
351
123
(137)
(16)
7)
©)
351)
(537)
52
(228)
351
123
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(137)
(16)
(27)
©
51)
(537)
52
(228)
351
123
(137)
(16)
en
(6)
(351)
(537)
52
(228)
351
123
HM Treasury
BA/POCL - Comparison of Options
28 May 1999
NPV@
6%
(137) (137) (1,080)
(16) (16) (202)
7) @7) (248)
(6) ©) (43)
G51) G51) (2,856)
(537) ($37) (4,429)
52 32 410
(228) (228) (1,835)
351351 2,856
123123 1,021
(150)
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BA/POCL - Comparison of Options
28 May 1999
Option A
£m favourable/(adverse) compared to baseline 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @ 6%
BA
Pathway (incl BES payments passed through POCL) ©) (2) (2) (92) (86). BD) 68) 45)— GG) 0 0 (431)
ACT costs, including contingency 0 0 (0) (0) (0) (10) (44) (84) (97) (78) (78) (232)
Cost of the “unbanked" 0 0 0 0 0 0 (8) (20) (30) (32) (32) (70)
CAPS savings 0 8 S136 137 137 137 137 137 137 137 881
POU savings 0 0 0 0 0 0 0 0 0 6 6 6
Payments to POCL saved @) a 16 2 2B 2B 33 4B 33351 351 5i4
BA net administrative savings (8) GB) 38 67 4 70 49 31 33 383 383 667
BA programme savings 0 86 137 137 137 137 137 137 137 137 137 905
BA net administrative savings and programme savings (8) 83 175 204 2 207 186 168 169 520 520 1,572
POCL
Capital costs and non recurring revenue costs (26) (19) [o) 0 0 0 (23) (ig) (23) 0 37 (126)
BA & girocheque income (15) 7) (32) (35) G7) (37) Gl) (41) (237) (51) 51) (714)
BA/SSA & girocheque related ABC costs 8 16 2B 33 33 32 47 107 138 161 161 469
Costs of POCL bank 0 0 0 0 0 0 0 oO 0 0 0 0
Network banking income 0 0 3 34 43 62 72 96 128 145 147 456
‘Network banking ABC costs 0 0 (9) (24) (30) (43) (50) (67) (89) (102) (104) 19)
Network banking systems charges 0 0 0) 0 a) 43s) 0) @) 6) 65) G4) ay
Cost of new banking technology 0 0 oO 0 0 0 oO D) 0 0 0 0
Other POCL contribution 5 5 9 28 32 37 29 23 28 31 30 in
Other systems charges (4) (40) (52), (64) (65) 59) (52), 4S), 43)— 42) ANY) 367)
Loss in other POCL contribution - footfall impact 0 a) Q) @) 4) @) ©) (0) ©) 0) (10) 36)
Other POCL net costs u 8 15 9 3 2 16 15 ul 8 9 91
Subsidy: retail impact subpostmasters 0 oO oO 0 0 0 0 0 0 0 0 0
POCL net impact on profits 6) 68) (40), GN) 2H) US) 4) 3) 27) C98) (156) (484)
ICL funding gap (ie ICL's NPV excluding £126m) 6) O) ©) Oy () (4) ©) (O) () O) () 36)
Total cashflow impact on Public Sector (44) 2 130 169 180 188 167 101 37 3 359 1,052
Less ICL termination payment in baseline 150
Total NPV impact on Public Sector 1,202,
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BA/POCL - Comparison of Options
28 May 1999
Option A delay
£m favourable/(adverse) compared to baseline 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @ 6%
BA
Pathway (incl BES payments passed through POCL) G9) 82) 2B) (BB)—— 7A) (57) BY) 0 (420)
ACT costs, including contingency 0 0 0) 0) (0) (©) @7)—— 69) (90) (88)—(78) (209)
Cost of the "unbanked" 0 0 0 0 0 0 @) = 20) G0) G32) GQ) (70)
CAPS savings 0 40 ” 125 136 137 137 137 137 137 137 822
POU savings 0 0 0 0 0 0 0 0 0 6 6 6
Payments to POCL saved ) O) 2 20 2B 23 33 4B 3 351 351 504
BA net administrative savings a () 18 3 a R 61 44 32 358 383 632
BA programme savings 0 43 1 137 137 137 137 137 137 137 137 843
BA net administrative savings and programme savings (7) 38 129 189 207,209 198 m1 169 495 520 1477
POCL
Capital costs and non recurring revenue costs 26) (19) 0) 0 0 0 @3) td) 0 37 (126)
BA & girocheque income a4) 8s) 8) G4) Gs) Gs I) Q37)—s BS) GS) (699)
BAVSSA & girocheque related ABC costs 8 2 20 29 3 32 47 107 138 161 161 431
Costs of POCL bank ) 0 0 0 0 0 0 0 0 0 0
‘Network banking income 0 0 13 34 43 2 n 96 128 145 M47 456
‘Network banking ABC costs, 0 0 (9) 24) G0) 43). (50) 7).— (BD) (102). (OY) G19)
‘Network banking systems charges 0 0 @) © ay 45) ay @) @) Gs) G4) a)
Cost of new banking technology 0 0 0 0 0 0 0 0 0 0 0 0
Other POCL contribution 5 3 9 28 32 37 29 23 28 31 30 172
Other systems charges Q@)— @3)— (50), (64) 65) (59) (52)—45)— (43), (42),— AY) (338)
Loss in other POCL contribution - footfall impact 0 0 Q) @) (0) @) (3) 6) © (10) (10) 5)
Other POCL net costs 6° 4 16 n 15 13 17 15 i 8 9 7
‘Subsidy: retail impact subpostmasters ) 0 0 0 0 0 0 0 0 0 0 0
POCL net impact on profits 2) 6%) ~~ G4) HA) 3) (27)— (195), (452)
ICL funding gap (ie ICL's NPV excluding £126m) (3) (0) (0) (8) a @ 8) ” (U) (8) (8)
Total cashflow impact on Public Sector @7) (8) 88 149 176 188 177 101 35 292 356
Less ICL termination payment in baseline
‘Total NPV impact on Public Sector
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Option B1 Core
£m favourable/(adverse) compared to baseline
BA
Pathway (incl BES payments passed through POCL)
ACT costs, including contingency
Cost of the "unbanked”
CAPS savings
POU savings
Payments to POCL saved
BA net administrative savings
BA net administrative savings and programme savings
POCL
Capital costs and non recurring revenue costs
BA & girocheque income
BA/SSA & girocheque related ABC costs
Cost of smarteards
Card Management Service (CMS)
Account setup
Systems charges for POCL banking
POCL banking ABC costs
POCL banking fraud costs
Network banking income
Network banking ABC costs
‘Network banking systems charges
Cost of new banking technology
Other POCL contribution
Other systems charges
Loss in other POCL contribution - footfall impact
Other POCL net costs
Subsidy: retail impact subpostmasters
POCL net impact on profits
ICL funding gap (ie ICL's NPV excluding £126m)
‘Total cashflow impact on Public Sector
Less ICL termination payment in baseline
‘Total NPV impact on Public Sector
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BA/POCL - Comparison of Options
28 May 1999
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @6%
0) = 25) ay) 19) 8) (0) 0 0 0 0 0 (73)
0 (10) (10), (83), (110) (83)— (78) (78), 78) (78) C78) (456)
0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 31 96 123 137 137 137 137 137 606
0 0 0 0 0 Q 6 6 6 6 6 16
@ 3) 28) 12 22-202, 351 351 351 351 351 1,243
a7) (49) 2) G9) 99 242416 416 416416 1,337
24 nR 96 129 134 137 152 152 152 152 152 918
7 2B 34 90233 3799 568568 568 568 568 2,254
26) G3) ©) 0 0 0 @3) 19), 32) @) 41 (47)
(4) 23) G0), 57) 150) @)— GSI) GSI) 352). GSK)—GSI).— (1,410)
8 7 1 31 108 159 161 161 161 161 161 nS
0 0 o ay @8) (6) (12) (10) @) © @) (65)
0 0 0 6) (15) (19) (is) ay (9) 6) 6) (57)
0 0 0 a9) 29) ©) a) a) a) Q) a (3)
0 0 0 @®) G3) 2) BA) 8) IN) ) (124)
0 0 0 (5) (65) (87),— (74) 59) 46) 3S) 27) (269)
0 0 0 20) 20) 20) (20) 20), 20) (0) (2) (104)
0 0 13 34 3 66 n 79 85 a 96 366
0 0 () 4) 0) (4S). (SD) S5)— (60) 6H). 6B) (256)
0 0 () 0 Mm) 6) «a7 08) 49) =) ay (86)
0 0 0 0 0 0 0 0 0 0 0 0
3 5 9 28 32 37 29 2B 28 31 30 172
a4) 41) 4) 65) 6S) 59) 52), 45) 3) 42) GAN) @71)
0 a) a) Q) a O) @) © a a) ay (40)
19 18 16 16 10 9 0 3 8 6 8 88
0 0 0 0 0 0 0 0 0 0 0 0
(22) (70) (58) (127) (257)—(256)-— (395) (457) (337)-——(284)—(224) (1,630)
180) 38) GG) DGB) GD) GGG) (439)
9s) 85) 3) (76) (63) 84 135 n 192 245305, 185
150
335
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BA/POCL - Comparison of Options
28 May 1999
Option B1 Sep 01
£m favourable/(adverse) compared to baseline 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @6%
BA
Pathway (incl BES payments passed through POCL) 0) (25) (22) ay (a) 0 0 0 0 0 0 (59)
ACT costs, including contingency (10) (10), (67), A) (16) (78) (78) (78), 78) (78) CB. (535)
Cost of the "unbanked" 0 0 0 0 0 0 0 0 0 0 0 0
CAPS savings 0 0 34 82 123 137 137 137 137 137 137 689
POU savings 0 0 0 0 0 6 6 6 6 6 6 20
Payments to POCL saved mM as) as) 102201 351 351 351 351 351 351 1,488
BA net administrative savings Q7) (49) (70) 63 207041641641 416 416416 1,604
BA programme savings 24 2 107 137 147 152 152 152 152 152 152 954
BA net administrative savings and programme savings i) B 37-200, 354 568568 568 568 568 568 2,558
POCL
Capital costs and non recurring revenue costs (26) G7) Q) 0 0 0 3) (119), 35) 0 al (47)
BA & girocheque income (4) (25) GB) (136) (212) (351) 51) G51) (352) (351) G51) (1,618)
BA/SSA & girocheque related ABC costs 8 7 16 48 104 147 161 161 161 161 161 R25
Cost of smartcards 0 0 (U) (24) Ql) (13) ay 0) @ (5) 4) (72)
Card Management Service (CMS) 0 0 (3) (12) (19) (17) (13) (10) (8) (6) (4) (63)
Account setup 0 0 ay (29) (12) a qa) (qd) a ay a (45)
0 0 @) (eo) (42) (38) 29) (22) (7) (13) 0) (137)
POCL banking ABC costs 0 0 (6) (51) (83) (80) (65) (52) (41) Gl) (24) (294)
POCL banking fraud costs 0 0 20) 20), 20), (2), D)-— HD) 20) (20) 20) (21)
Network banking income 0 0 13 35 44 67 74 80 85 on 96 370
‘Network banking ABC costs 0 0 (9) (24) Gl) (46) (51) (55) (60) (64) (67) (257)
Network banking systems charges 0 0 Oy 0 a) a6) a7) 48) 19) 2) (86)
Cost of new banking technology 0 0 0 0 0 0 0 0 0 0 0 0
Other POCL contribution 5 5 9 28 32 37 29 23 28 3h 30 172
Other systems charges (4) (41) (54) (65) (65) (59) (52) (45) (43) (42) (41) (370)
Loss in other POCL contribution - footfall impact 0 a) () 0 (2) a” (9) (io) (10) ay (12) (39)
Other POCL net costs 16 18 16 12 9 7 (dd) 3 8 7 6 nn
Subsidy: retail impagt subpostmasters 0 0 0 0 0 0 0 0 0 0 0 0
POCL net impact on profits (25) (74) (95), (274)— 329) (390), B79) (445) B31) (274) (220) 1,904)
ICL funding gap (ie ICL's NPV excluding £126m) (180) (32) (33) (32) (33) (32) (33) (32) (33) (32) (33) (395)
Total cashflow impact on Public Sector 208) (83) (92)_——(106) @) 46 156 om 204 262 315 259
Less ICL termination payment in baseline 150
Total NPV impact on Public Sector 409
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BA/POCL - Comparison of Options
28 May 1999
Option BI high
£m favourable/(adverse) compared to baseline 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @6%
BA
Pathway (incl BES payments passed through POCL) (9) 5) 4) C9) (8) (©) 0 0 0 0 0 (73)
ACT costs, including contingency 0 (10) (40) (83)— (10) (83) (78) (7B). (78),— (78) C8). (456)
Cost of the "unbanked" oO 0 0 0 0 0 0 oO 0 0 0 0
CAPS savings 0 0 0 31 96 123 137 137 137 137 137 606
POU savings oO oO 0 0 0 Oo 6 6 6 6 6 16
Payments to POCL saved 12) (15) (28) 12 122 202 351 351 351 351 351 1,243
BA net administrative savings (17) (49) (62) (39) 99 242 416 416 416 416 416 1,337
BA programme savings 4 n 96 129 134 137 152 152 152 152 152 918
BA net administrative savings and programme savings 7 B 34 90 233 379 568 568 368 568 568 2,254
POCL
Capital costs and non recurring revenue costs (26) 3) ©) 0 0 0 3) (19) @) 41 (47)
BA & girocheque income (14) (25) (30) (57) (150) (Ql) G51) (351) (352) G51) (351) (1,410)
BAISSA & girocheque related ABC costs 8 7 7 Bly 108 159 161 161 161 161 161 mS
Cost of smartcards 0 0 o as) 67) 6) 20) 9) 7) 8) 18) (110)
Card Management Service (CMS) 0 0 0 © (9 26) 24) 22) 20) (16) 7)
Account setup 0 0 0 (24) G7) (6) Q) Q) Q) 2) @Q) (7)
Systems charges for POCL banking 0 0 0 (10) (43) (59) (55) (48) (44) 9) (35) (215)
POCL banking ABC costs 0 0 0 19) (86) (423), 420) (113) (108) 97), (90), (480)
POCL banking fraud costs 0 0 oO (25) (25) (27) (33) (33) 32) (32) (32) (154)
Network banking income 0 0 13 34 43 63 67 7 75 719 84 336
‘Network banking ABC costs 0 0 0) 24) (30) (44) a7) (49) (52) (56) (59) (235)
‘Network banking systems charges 0 0 (4) (9) (ay (1s) (16) (16) (16) a7) (18) (78)
Cost of new banking technology 0 0 0 0 0 0 0 0 0 0 0 0
Other POCL contribution 3 5 9 28 32 37 29 23 28 31 30 172
Other systems charges (4) (aly (54) (66) (65) (59) (52) (45) (43) (42) ly G71)
Loss in other POCL contribution - footfall impact ) (O) QQ) Q) @) @) @) 6) (6) ©) fol (25)
Other POCL net costs. 21 18 7 16 10 7 Ww 3 5 6 7 86
Subsidy: retail impact subpostmasters 0 0 0 0 0 0 0 0 0 0 0 0
POCL net impact of profits (20) (70) (57) (148) (313) (334) (491) (564) (452) (402) (343) (2,069)
ICL funding gap (ie ICL's NPV excluding £126m) as) 20) a a a a a (315)
Total cashflow impact on Public Sector (193) (67) (44) (79) (101) 24 56 ayy 95 145 204 (129)
Less ICL termination payment in baseline 150
Total NPV impact on Public Sector
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BA/POCL - Comparison of Options
28 May 1999
Option B3 Marketing
£m favourable/(adverse) compared to baseline 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @6%
BA
Pathway (incl BES payments passed through POCL) (10) (26) (23) (13) (5) (2) 0 0 0 0 0 (66)
ACT costs, including contingency 0 (10) (83) (110) (83) (78) (78) (78) (78) (78) (78) (515)
Cost of the "unbanked"/New Service Provider(NSP) i) 0 0 0 (22) (63) (70) (59) (48) (35) (21) (204)
CAPS savings 0 0 7 48 86 108 126 137 137 137 137 584
POU savings 0 0 0 0 0 0 6 6 6 6 6 16
Payments to POCL saved q (15) (Qt) (i 267 326 351 351 331 351 351 1,433
BA net administrative savings (y) (50) (120) (76) 242 291 334 357 368 381 394 1,248
BA programme savings 24 n 104 124 140 148 152 152 152 152 152 933
BA net administrative savings and programme 7 2 (16) 48 38238486 «S09 520.533 546 2,181
savings
POCL
Capital costs and non recurring revenue costs (26) (33) (6) 0 0 Oo (23) (ig) (32) GB) 4 (148)
BA & girocheque income 24 = (17) (10) 29) 283) 37) G51). B51). GS2).— SL) GBSI)— 561)
BA/SSA & girocheque related ABC costs 15 14 40 100 1330 15h 161 161 161 161 161 821
Costs of POCL bank 0 0 0 0 0 0 0 0 0 0 0 0
Network banking income 0 0 B 35 54 85 88 90 92 o4 97 4
Network banking ABC costs 0 0 ©) 24) 8)— 59) (62)—“isB)-—s—s/S).-—s 6H) 6B) (288)
Network banking systems charges 0 0 ) 0) (4) (20) Qt) @) (22) (22) (23) (99)
Cost of new banking technology 0 0 (5) (39) (19) 0 0 tt} 0 0 0 (49)
Other POCL contribution 5 5 9 28 32 37 29 23 28 31 30 172
Other systems charges (14) (41) (54) (57) (66) (64) (52) (45) (43) (42) (41) (368)
Loss in other POCL contribution - footfall impact (0) ro) ri) qd @Q) (5) (8) 9) (10) qi) aby (37)
Other POCL net costs 7 7 22 35 32 i 3 6 9 10 10 138
Subsidy: retail impact subpostmasters 0 0 (5) (10) 20) G0) 30) (30) 30) G0) (G0) 37)
POCL net impact on profits (36) (56) (10) 47 (193) (232) (266) (359) (263) (229) (185) (1,145)
ICL funding gap (je ICL's NPV excluding £126m) (180) 5) 8) 5) HS) 3A
Total cashflow impact on Public Sector (209) 59) (50) 0 165 182 197 125 233 279 337 695
Less ICL termination payment in baseline 130
‘Total NPV impact on Public Sector 845
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BA/POCL - Comparison of Options
28 May 1999
Option B3 no marketing
£m favourable/(adverse) compared to baseline 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @6%
BA
Pathway (incl BES payments passed through POCL) (0) 26) 3) 22) (18) (4) 0 0 0 0 0 (84)
ACT costs, including contingency 0 0 0 (10) (93) (0), (78)— (78) (78), (78) (78) (87)
Cost of the "unbanked"/New Service Provider(NSP) 0 0 0 0 0 (44) 70), (59) 48) GS) QI) (74)
CAPS savings 0 0 0 0 34 103 137 137 137 137 137 505
POU savings 0 0 0 0 0 0 0 6 6 6 6 B
Payments to POCL saved @ (8) (4) (13) 53 159 337 357 357 357 357 1,179
BA net administrative savings a2) G4) G7) 43), 23) 103 345 362 373 386 400 1,052
BA programme savings 4 n 96 96 10 138 152 152 152 152 152 874
BA net administrative savings and programme savings 12 38 39 sl 87 241 497 514 525 538 552 1,926
POCL
Capital costs and non recurring revenue costs (26) (33) (6) 0 0 0 3) (19), Gy @) 41 (148)
BA & girocheque income 4) (23) 25)— 25), (70), (178), 351) BST) (352) B51) SI) (1,295)
BAJSSA & girocheque related ABC costs 9 8 7 7 3 128 161 161 161 161 161 627
Costs of POCL Bank 0 0 0 0 0 0 0 0 0 0 0
Network banking income 0 0 13 34 50 85 96 98 100 102 105 432
‘Network banking ABC costs 0 0 @ 24) G4) 59) 67) 6B O23) 01)
Network banking systems charges 0 0 ) 0) 03) @) 2) 3) QB) A) QS) (104)
Cost of new banking technology 0 0 0 0 0 0 0 0 0 0 0 0
Other POCL contribution 5 5 9 28 32 37 29 23 28 31 30 17
Other systems charges a4 4) 4) GH) A) 52) 45) 3 (368)
Loss in other POCL contribution - footfall impact 0 O) a) a) @ a 43) 3),— 3), 3) 38) (52)
Other POCL net costs 9 16 18 18 17 15 6 8 13 12 12 105
Subsidy: retail impact subpostmasters 0 0 0 0 (5) G0) GN) GB) GO) BO) GO) (21)
POCL net impact on profits GD 7) 2) 29) GD). 94). 267) 359) (262) (229) (184) (4,052)
Sub total impact on the Public Sector (18) G3) 8 2 2 148 230 155 263 309 368 875
ICL funding gap (ie ICL's NPV excluding £126m) as) 2) a Day 16)
Total cashflow impact on Public Sector 198) 54) (13) 1 6 127 209 134 242 288 347 559
Less ICL termination payment in baseline 150
Total NPV impact on Public Sector 97) 407), @7) 1 n 2340419 269 484 S77 os 709
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BA/POCL - Comparison of Options
28 May 1999
Option C - 2 year ACT migration
£m favourable/(adverse) compared to baseline 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @ 6%
BA (Option 3 adjusted re POCL payments)
Pathway (incl BES payments passed through POCL) ao) 26) (16) CO) 0 0 0 0 0 0 0 (48)
ACT costs, including contingency 0 (10) (88) (110) (78), (78), (78), (78) (78) (78) (78) (515)
Cost of the "unbanked" 0 0 @) =@20)— GO) Gs GG) GV GVO). (163)
CAPS savings, 0 0 34 103 137 137 137 137 137 137 137 116
POU savings 0 0 0 0 0 6 6 6 6 6 6 20
Payments to POCL saved O) (8) 10 76 369 363 357 357 357 357 337 1,650
BA net administrative savings (12) (44) (68) 45 398 395 389 389 389 389 389 1,660
BA programme savings 24 n 110 138 152 152 152 152 152 152 152 961
BA net administrative savings and programme savings 12 28 2 183 550 548 341 S41 sal 3a sa 2,621
POCL
Capital costs and non recurring revenue costs (5) 24) 0°) 0 0 0 23) 23), (23) 0 19 (14)
BA & girocheque income a4) 27) 77) 173) 358) GSI) G51) B51). 52)_— GSI) BS) ,797)
BA/SSA & girocheque related ABC costs 8 i 31 126 164 161 161 161 161 161 161 874
Cost of POCL bank 0 0 0 0 0 ) 0 0 0 0 0 0
Network banking income 0 0 15 44 59 8B 80 82 85 87 89 397
Network banking ABC costs 0 o «0 GI) @) 4 (6) 67) = 59) I). (276)
Network banking systems charges 0 0 0 0 0 0 0 0 0 0 0 0
Cost of new banking technology (12) (95)—(213),— (235) (135), (107),— (8), (147), (144) BO) (80) (980)
Other POCL contribution 5 3 9 28 32 37 29 23 28 31 30 72
Other systems charges 0 0 0 0 0 0 0 0 0 0 0 0
Loss in other POCL contribution - footfall impact 0 O) © Gd (4 (4 4) 4) 4) (1) (76)
Other POCL net costs 10 10 10 13 2 2 1 9 12 12 12 70
Subsidy: retail impact subpostmasters 0 0 (10) = 0) 30) GB) GO) GO) OGG) «s7)
POCL net impact on profits (58) (121)_——(239) (259) (321), (278) BIS) (347)_——(336)— 245) (226) (1,886)
ICL funding gap (ie ICL's NPV excluding £126m) 0
Total cashflow impact on Public Sector 46) 3) (197)— (76) 229 270 226 194 205 296 315 4
Less ICL termination payment in baseline 0
Total NPV impact on Public Sector 4
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Option Cx
£m favourable/(adverse) compared to baseline 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @ 6%
BA
Pathway (incl BES payments passed through POCL) (10) (26) (23) (22) (16) (4) 0 0 0 0 0 (84)
ACT costs, including contingency 0 0 0 (10) (88) (110), (78)— (78) (78) (78) (78) (383)
Cost of the “unbanked" 0 0 0 0 (8) (20) (30) (32) (32) (32) (32) (lay
CAPS savings 0 0 0 0 34 103 137 137 137 137 137 505
POU savings 0 0 0 0 0 0 0 6 6 6 6 B
Payments to POCL saved Q) () (4) (13) 33 159-357, 387357357357 1,179
BA net administrative savings (2) G4) G7) 45). 26) 128 3850389389 389389 1,116
BA programme savings 24 2 96 96 110 138 152 152 152 152 152 874
BA net administrative savings and programme savings 12 38 39 st 842665385 S41 sat S41 1,990
POCL
Capital costs and non recurring revenue costs (55) (24) 0) 0 0 0 (23) (23) (23) 0 19 (ay
BA & girocheque income a4) @7)— 3) 6)— (84). 170), G51) BS1)— 352) GSI) GSI) (1,319)
BA/SSA & girocheque related ABC costs 8 i 16 20 37 125 161 161 161 161 161 655
Cost of POCL bank 0 tC) 0 0 0 0 0 0 0 0 0 0
Network banking income 0 0 13 34 49 85 96 99 101 103 105 433
Network banking ABC costs 0 0 0) (24) G4) 59) /T)— HD). 0) (SA). (302)
Network banking systems charges 0 0 0 0 0 0 0 0 0 0 0 0
Cost of new banking technology 0 (74) (204), (217) (103). (98) (118) (147) (144), (80) (80) (898)
Other POCL contribution 5 5 28 32 37 29 23 28 31 30 12
Other systems charges 0 0 0 oO 0 0 0 0 0 0 0 0
Loss in other POCL contribution - footfall impact 0 (ay (2) (2) (5) (10) (13) (13) (13) (13) (13) (54)
Other POCL net costs 12 10 ra 12 4 13 7 9 12 12 13 90
Subsidy: retail impact subpostmasters 0 0 0 0 (10) ~— 20) GB), BO) GO) GD)-— GO) (ry
POCL net impact on profits (44) (100) (208) (185), (84) (97) (309) (341) (330) (239) (220) (1,447)
ICL funding gap (ie ICL's NPV excluding £126m) 0
Total cashflow impact on Public Sector G2) (62) (149) (134) 0 169 229 200 2 302 321 543
Less ICL termination payment in baseline 0
‘Total NPV impact on Public Sector 543,
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BA/POCL - Comparison of Options
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Appendix 4
Discussion of NPV movements for options B1 compared to option A
Discussion of NPV movements
ICL's NPV excludes £126m
Cashflows exclude VAT and sunk costs (except ICL's NPV includes sunk costs)
Variance from option A
Option BI BL BI Sep 01 BI High Discussion of significant movements
BA
Payments to Pathway 358 372 358 Only OBCS payments continue
ACT costs, including contingency (224) (303) (224) This is caused by a change in phasing of ACT migration. Under options
BI, migration begins 1-2 years earlier than in A and the steady state is
reached in 5 rather than 7 years so that migration costs are compressed.
Cost of the "unbanked” 70 10 70 This is assumed to be eliminated under option BI since the unbanked
would have POCL bank accounts opened.
CAPS savings (275) (192) (275) CAPS savings are generated by the move away from order books. Since
the migration from order books to ACT in option BI occurs later than the
move from order books to ACT in option A, these savings are delayed.
POU savings 10 4 10
Payments to POCL saved n9 974 729 This is primarily caused by the earlier ending of the floor payment to
POCL
BA net administrative savings 6 336 68
BA programme savings 13 49 13
BA net administrative savings and programme savings 682 385 682
POCL
Capital costs and non recurring revenue costs (ea) ay) (21) Primarily cost of PIN pads (£18m NPV)
BA & girocheque income (696) (904) (696) Primarily a result of the earlier ending of the floor payment from BA
BAJSSA & girocheque related ABC costs 246 255 246 Costs of orderbook transactions saved, more than offset by POCL.
banking and network banking costs (see below)
Cost of smartcards (63) (2) (110)
Card Management Service (CMS) (7) (63) (97) Card management costs are borne by POCL under option B1 rather than
BA as under option A.
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Discussion of NPV movements
ICL's NPV excludes £126m
Option BI
Account setup
‘Systems charges for POCL banking
POCL banking ABC costs
POCL banking fraud costs
‘Network banking income
Network banking ABC costs
‘Network banking systems charges
Cost of new banking technology
Other POCL contribution
Other systems charges
Loss in other POCL contribution - footfall impact
Other POCL net costs
‘Subsidy: retail impact subpostmasters
POCL net impact on profits
Sub total impact on the Public Sector
ICL funding gap (ie ICL's NPV excluding £126m)
‘Total cashflow impact on Public Sector
ICL termination payment estimate
TOTAL Impact on Public Sector
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Inflows exclude VAT and sunk costs (except ICL's NPV includes sunk costs)
Variance from option A
BI
(43)
(124)
(269)
(104)
(90)
0
(146) (420) 585)
(465)
(403)
(868)
0
(B68)
BiSep01 BI High
(45) ci)
(137) (215)
(294) (480)
(2n) (154)
(86) (120)
2 84
25 32
0 0
0 0
3) (4)
@) it
(12) ©)
0 0
(435) (903)
59) (279)
(794) (1,182)
0 0
94) (182)
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BA/POCL. - Comparison of Options
28 May 1999
Discussion of significant movements an
POCL estimate of administrative cost of opening POCL bank accounts of
£4.50 per account. Includes counter time for mandate completion (~£2)
and PIN selection (~SOp), and transmission and storage of physical
mandates (~£2).
POCL estimate of the cost of fraud risk together with the administrative
costs of initial fraud investigation
In option A, all customers would eventually migrate to ACT into
conventional bank accounts, a proportion of which would generate
network banking income. In option B1, some of these customers remain
with POCL bank, thus reducing network banking income.
Réduction in network banking costs offsetting the loss of network
banking income
Reduction in network banking costs offsetting the loss of network
banking income
‘Not applicable to this option
Not applicable to this option
Note that this includes (£121m) cost associated with the operation of
POCL bank accounts. This cost may be overstated since the activity
would be subject to competitive tender. However, Girobank's estimate is
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BA/POCL - Comparison of Options
28 May 1999
Appendix 5
Derivation of cashflows
All cashflows are to 2009/10, exclude sunk costs (except ICL) and also exclude VAT payments by the public sector
iA IA Delay BI Core BI Sep OF BI High B2 B3 Marketing IB3 No ic Cx
Marketing
BA IBA 20/4 I]KPMG BA 16/4 IBA 15/4 Equivalent to I BA 8/4 adjusted IBA 30/4 IBA 13/5 IBA 17/5 BA 17/3
estimated IB1 Core for BA Iby KPMG for adjusted by
impact on A of consistency withI KPMG for
16 month slip in other options: consistency with
rollout, reallocation of other options:
discussed with IACT costs; Icontingency/ES
IBA (copy to BA 100% of fraud INS costs; POCL
122/4) savings with savings based
IACT jon fixed fee
[element during
IACT migration
POCL POCL 15/4 IPOCL 15/4 IPOCL 15/4 less IAs for option IPOCL 15/4 less IAs for option [Estimated by IPOCL 18/5 POCL 20/4 IPOCL 20/4
lcard set off [Bl core, and ard set off IB core,and IKPMG4/5__— adjusted by —fadjusted by —_—fadjusted by
lsavings and —_adjusted by savings and adjusted by IKPMG: assume IKPMG: reduce IKPMG: reduce
Iprefunding costsIKPMG as prefunding costsIKPMG in /Pathway cost ofnew —_fcost of new
instructed by consultation lcontinues to. {banking banking
POCL 22/4 to with POCL 22/4 Iprovide core jtechnology; technology;
jcorrect 2004/05 ito reflect system/network Iinclude interim Iinclude interim
IBA/SSA income} jestimated banking to banking; include] banking; include]
included in error} impact on ‘no 12010, based on Isubsidy to subsidy to
floor? Iscorecard Isubpostmasters Isubpostmasters
pricing
ice TCL 1574 TCL 15/4 TCL 1474 plus IAsfor option ICL 14/4 plus ICL 313 Estimated by IEstimated by [N/A INVA
bank operating IB1 core bank operating KPMG 4/5 KPMG 4/5,
costs as costs as
jestimated by jestimated by
ICL earlier ICL earlier
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Appendix 6
‘Cashflows for B3 offer to ICL
Introduction
After completion of the value for money analysis presented in this report, the public sector parties entered into negotiations with ICL for the delivery
of option B3. During the negotiations, KPMG staff supported HM Treasury in assessing the impact on cashflows of the proposals made by both
private and public sectors. For completeness, the table overleaf presents the cashflows relating to the latest offer which was modelled, and which we
understand to have been the basis for the heads of agreement.
Note that the BA cashflows in this table are based on 1998/9 prices while those in the other cashflow tables are based on 1997/8 prices.
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BA/POCL - Comparison of Options
28 May 1999
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV @ 6%
POCL! from Cx to max 360)
1 BES payments passed through POCL) (26) (24) (23) (16) @ 0
ACT costs, including contingency 0 0 0 (10) (96) (113) (80)
Cost of the "unbanked"/New Service Provider(NSP) 0 0 0 0 (46) (72)
CABS savings 0 0 0 0 35 105 140
POU savings 0 0 0 0 0 0 0
Payments to POCL saved (2) (8) (4) (14) 54 163 360
BA net administrative savings (12) G5) G8) (46), 23) 106 (348
BA programme savings 25 ” 98 98 13 141 156
BA net administrative savings and programme savings 39 60 52 89 aD 504
POCL (POCL 18/5, adjusted to assume Horizon continues to 2010)
Capital costs and non recurring revenue costs (adj'd) (33) (6) 0 0 (20) (23)
BA & girocheque income 2) G4) G4) G4) 79), 184) G60)
BAVSSA & girocheque related ABC costs 3 12 it it 46 132 165
Costs of POCL bank oO 0 0 0 oO 0 0
‘Network banking income oO 0 13 34 50 85 96
‘Network banking ABC costs 0 0 © 24 G4) 69) 6)
‘Network banking systems charges (adj'd) 0 0 @) (9) (13) (20) (22)
Cost of new banking technology (adj'd) 0 0 0 0 0 0 0
Other POCL contribution 5 5 9 28 32 37 29
Other systems charges (adj'd) a4) 41) 4) 57) HA) (52)
Loss in other POCL contribution - footfall impact 0 0) @ a) @ a) (3)
Other POCL net costs 9 16 18 18 7 15 6
Subsidy: retail impact subpostmasters 0 0 0 o 5) G0) 0)
POCL net impact on profits G7) (76) (57) 34) (66). Y). 272)
Sub total impact on the Public Sector 4) G7) 4 1g 2B 149232
ICL funding gap (ie ICL's NPV excluding £126m) (134) (190) 28) (25), 20), 29) CA8)
Total cashflow impact on Public Sector (158) (226) (24) ” 3 120 25
Less ICL termination payment in baseline
Total NPV impact on Public Sector (16 (452) 48) (4) 7 mt 429
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0
(80)
(60)
140
360
366
156
321
(119)
(360)
165
0
98
(68)
(23)
0
23
(43)
(13)
8
(30)
(364)
158
(50)
107
215
0 0 0 (86)
(80) (80) (80) 397)
(49) 35) (22) (178)
140 140 140 5i7
6 6 6 13
360-360-360 1,192
377 391 404 1,062
156 156 156 896
533 546560 1,958
(32) (3) 41 (148)
(361) (360) (360) (1,367)
165 165 165 658
0 0 0 0
100 102 105 432
(0) (72), (3) 01)
@3) = @4)— 2) (104)
0 0 0 0
28 3 30 172
(3) 2) (368)
(3) 3) (13) (62)
13 12 12 105
30) 30) (30) (21)
(267) (234) (189) (1,093)
266 312 371 865
27) 28) 29) (463)
239 285 342 402
150
478 570 oss 552
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