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POB(96)33 Copy No. 18.3
POST OFFICE BOARD =
Introduction
L. This paper seeks Board authority for Post Office Counters Ltd (POCL), in conjunction
with the Benefits Agency (BA), to proceed to the contract award stage of the counter
automation project, and follows from MaPEC’s approval on 30 April (Minute MP96/45
refers).
nN
The projeci includes the automation of all counter positions in all post offices, and the
new card based benefit encashment service. The business case shows that there are strong
strategic and commercial reasons for POCL to automate. The financial case, based on
supplier responses, has provides a positive net present value benefit over the life of the
i contract, details of which are at Annex A,
tas
Automation is a key enabler for POCL to maintain existing business and exploit its wider
powers to attract profitable new business; to secure continued efficiency improvements,
to deliver the political and commercial objective of maintaining a nation-wide network of
offices.
4. Total programme management costs for POCL to support implementation of £15.8ni are
required, inclusive of £5.4m incurred to date.
$. POCL, together with the Benefits Agency (POCL’s largest client), has established a joint
programme to provide automated services to support the end-to-end process of paying
benefits through post offices, together with existing and new POCL business. Ministers
expect these services to be procured through the Private Finance Initiative (PFI) and to be
available in all post offices. Each post office will have an integrated facility providing the
new card based benefit payment service, automated payment terminal, Electronic Point
of Sale (EPOS) capability, and provide the capability to support other fimetionality as
required.
Strategic and-commercial imperatives
The programme represents a major opportunity for POCL to modemise its operations
and position itself as the leading nation-wide provider of automation-based retail
services. It will provide a platform for POCL’s commercial strategy of growth, and will
enable POCL to exploit wider powers and help defend its position against existing and
new conipetition. A majority of the product development opportunities identified in
POCL’s business plan proposals require, or will be enhanced by, automation. Of planned
product development opportunities, 35% are considered to be highly dependent on
automation, and a further 45% have a medium level of automation dependence,
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The project also locks in POCL's largest client, BA and realises two strategic goals. It
reduces the risk of anticipated volume and income decline from greater use by customers
of Automated Credit Transfers, and it eases pressure on POCL prices. As part of the
programme, POCL and BA have negotiated a back-to-back deal which provides for an
eight year contract. This includes a floor income level from BA, irrespective of actual
volume, a limited efficiency discount of 1% per annum and a sharing of residual fraud
liability risk.
8 Under the PFI the private sector will provide the initial capital outlay which is
remunerated by the income stream generated over the life of the contract. POCL and BA
have defined the outputs it requires but the details of design, build and operation of the
system are the responsibility of the private sector. There is a requirement to demonstrate
transfer of risk from the public to the private sector. The nature of the PFI deal means
that POCL will only pay for the system as it uses it, and that there is no capital
investment by the Post Office,
9. Additionally, POCL sees this development as an opportunity to forge a strategic alliance
with the private sector service supplier. POCL expects to benefit from this by bringing in
private sector skills in product development and marketing, together with the potential
for the supplier to bring in products from their own and associated businesses to use the
service. However, in exploring these opportunities POCL has ensured it maintains
control over its key business processes, and the use made of the services.
10, Annex B sets out the non-negotiable elements of the deal agreed by the Board adopted
last November (POB95/116
}, and shows that each of them has been secured,
11. The financial evaluation has considered the proposals of three suppliers (code named
“Tom”, “Dick” and “Harry”). These proposals have been evaluated against a base case in
which the expansion of automation would be limited and incremental. In this option,
POCL would get some limited benefit from new business such as bill payment. The base
case assumptions were independently reviewed by Coopers & Lybrand and are as robust
as possible.
12. For comparative purposes a Post Office funded investment was also evaluated. However,
in this scenario substantial greater risks would remain with POCL, and in practice it is
unlikely that Government would allow the project to proceed on a conventional public
sector funding basis.
13. The financial evaluation demonstrated that there was a positive return at 12% for all three
suppliers as follows, taking account of weighted risk values to key variables.
NPV whole project life im Tom Dick Harry
Best view .47 65 52
Including risk assessment 130 4s 35
Ranking 3rd ist 2nd
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Non-fi ial .
14. The suppliers were also evaluated on the following:
* contract assurance: this reviewed suppliers’ bids to identify any non-commpliances
and reach a conclusion on their significance. The review was supported by
commercial lawyers. It ranked the suppliers in the order (1) Dick, (2) Tom and G)
Harry. It considered that Harry should not be awarded the contract because of its
unacceptable degree of non-compliance with contract requirements. Tom’s tender
was deficient against several key contractual requirements. Whilst this was
insufficient to rule it out completely, it would have to offer a considerable price
advantage to the proposal tendered by Dick.
° risk transfer: this considered the overall position (so as to reach a view on potential
PFI clearance) but also, given its importance to both sponsors, to look in more detail
at fraud risk. The review concluded (supported by Charterhouse) that the deal with
Dick was close to the risk transfer sought and would secure PFI clearance. Although
Harry was prepared to accept some fraud risk, the conditions associated with the
volume qualification and RPI linkage made the risk transfer position less clear cut.
The risk transfer in Tom’s tender was very limited and would not satisfy the
requirements for a PFI.
* non-financial characteristics: this reviewed suppliers’ performance against a
number of characteristics, including customer acceptability, reliability and support,
management capability, etc. All three suppliers exceeded the acceptable level with
the differences between them sot significant for the purpose of discrimination.
* partnership: this reviewed the ability of the suppliers to be a partner for POCL in
securing future new business. The review concluded that all three suppliers were
satisfactory potential future partners.
7 5
1S. The Programme Evaluation Board (PEB) recommended that, on financial and non-
financial criteria, the contract should be awarded to Dick. This recommendation has
subsequently been endorsed by the Joint Steering Committee (which includes DTI, DSS
and Treasury representatives).
Annex C (in the form of a minute to the co-chairmen of this Committee - the MD POCL
and the Chief Executive of the Benefits Agency - from the PEB)} describes the
background to this decision. It highlights, in particular, those issues around
recommendations (including price}, and risk transfer, which make Harry and Tom
unacceptable respectively,
16. At MaPEC the recommendation was endorsed and approval to proceed granted, subject
to Board approval, with ‘in principle’ authority for programme implementation costs of
£10.4m, and subject to the following specific conditions:
® the finally negotiated contract terms should continue to generate a case with a positive
Net Present Value; if this was materially different (.e., no better than the next best
bid) to that presented, the financials should be re-represented to MaPEC for approval;
* the risks continued to be at an acceptable level;
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* there was a requirement to ensure that the proposed technical solution of the chosen
supplier was signed off in a revised Group IT Technical Concurrence prior to signing
final contracts, as to the supplier working within the overall Post Office IS strategy
(applications and architecture}, and that POCL was not precluded from taking
advantage of standard software upgrades in the future;
* once the contract has been agreed/awarded, the financials should be re-submitted to
the Secretariat, with significant variances explained, for noting at MaPEC, which L
should form the basis of future monitoring; and a six monthly report back to MaPEC L
thereafter. To avoid separate sets of information, a standard format of this report was
to be used and should be agreed with the Secretariat;
* the individual assumptions detailed in both the base and PFI cases must be tracked
and reported through a benefits management plan, and continued throughout the life of
the contract;
® Counters Executive Committee (CEC) should assume the role of Programme Board to
oversee all fisture retail initiatives and the financial progress of the programme,
reporting back on key milestones, timescales and financials, ensuring that
benefits/costs are incrementally identified to the BA/POCL initiative;
* the risk management plan must include provision for identification, and avoidance of,
potential contract variations;
Risk management
17. Managing the risks around the contract will be done in a number of ways:
® preventative measures such as guarantees, break clauses and contractual service
levels,
* joint working between POCL, BA and the supplier,
* commercial imperative for both POCL and the supplier on delivery.
However, unlike conventional procurement, under the PFI the onus rests on the supplier
who accepts and underwrites a far greater degree of risk, both in the short and long term.
Other risks
18. Some technical risks were identified with all suppliers, and in some areas, Dick was
considered to have higher technical risks than Tom and Harry. However these risks are
manageable through:
® a strong technical assurance function, with support from the Post Office IT
Directorate,
® rigorous testing at development, trial and roll-out stages,
* ensuring supplier contingency plans,
* a pro-active technical management plan.
The risk relating te contracting parties was viewed by Charterhouse, and confirmed as
having the resources to meet contract commitments. This has been further endorsed by
the Chairman of the parent company direct to the President of the Board of Trade.
There is one further outstanding issue to be settled between POCL and the Social
Security Agency, who are responsible for the benefits payments in Northern Ireland, on
the back-to-back commercial terms. This has now been escalated politically, and an oral
update will be given at the meeting on its latest status.
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Next steps
19. In parallel with this submission, BA are seeking the necessary authorities to proceed
from their Secretary of State and the Treasury. As this is high profile procurement the
Prime Minister's office is also involved. The planned timetable is:
Announcement by Secretary of State for Social Security 1S May 1996
Contracts signed End May 1996
Operational trials and linked ‘go live’ September 1996
Roll out commences Early 1997
Roll out complete in post offices Spring 2000
Recommendations
20. The Board is invited to:
« Note MaPEC approval subject to the conditions set out at paragraph 16 above, has
been obtained;
« Note proposed total POCL programme expenditure, inclusive of sunk costs, of
£15. 8m;
* Authorise devolvement to MaPEC for full authority of future programme
management costs;
e Authorise POCL to proceed to full contracts with BA and the successful supplier.
AJR
May 1996
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ANNEX A(i)
SUMMARY OF PROJECT INFORMATION
GENERAL
Project Title:
Project Sponser:
Programme Director:
Project Controller (POCL):
FINANCIAL DATA
Capital
Non-Recurring Revenue
Departure From Estimate
MAXIMUM AUTHORISED EXPENDITURE,
Authorised in principle
Sunk Costs: Authorised
SUM TO DETERMINE AUTHORITY LEVEL
FORECAST RESULTS
Based on an 8 year contract
NPV at 12% - Pre Tax
NPV at 12%
® - Pre Tax including Risk £x1
BA/POCL AUTOMATION
Richard Dykes/Stuart Sweetman, Managing Director
Andrew Stott, Programme Director BA/POCL
Paul Rich, Financial Markets Business Centre Director
Outturn £m
Comparative NPV to base case
Base PO Tom Harry
procurement
&m 6h) 124 47 52
G61) 50 30 35
COMPARATIVE EFFECTS ON TARGETS (* Preferred PFI Supplier)
Pre Tax Profit £m
EPL £eo
RUC %
Year 0 Year 1 Year 2
0.7) 6.7 25.6
(1.2) 79 23.8
(0.96) 06 2.3
SENSITIVITY AND RISK ANALYSIS
Sensitivity analysis has been
programme. Whilst an NPV of £65m is expected, sensitivity ana
around £60m.
KEY TARGET DATES
MaPEC authority to proceed
the assessment of risk
is indicates a likely NPV of
undertaken by the project team, wit
30 April 1996
Board endorsement O7 May 1996
Announcement by Secretary of State 1S May 1996
Contracts signed End May 1996
Commence Roll-out Spring 1997
Finalise Roll-out Spring 2006
PIR date December 2000
CONCURRENCES
Strategic Richard Dykes Managing Director, POCL
Operational: Jonathan Evans Network Director, POCL.
Financial: Roger Tabor Finance Director, POCL
Commercial Richard Wheelhouse Commercial Director, POCL
Technical: Duncan Hine Technology & IS Director, Group IT Directorate
Alan Shepherd Director of Research, Group IT Directorate
Basil Shall Group Head of IS Planning, Directorate
Wendy Powney POCL Head of IS Strategy
OPTIONS
Sponsors have evaluated the
responses to tender against the option of a minimal ‘do nothing’
baseline, and a Post Office public procurement route. The comparative financial data is
outlined in Af il).
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Dick*
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ANNEX A{ii}
SUMMARY OF PROJECT INFORMATION
I
Base Case PO Procurement PFI Automation {
(preferred supplier)
I Income i
Benefits Agency 2119 2069 2119
Volume Change (203) vas i V7
Price Change (296) 107 107,
Sub Total 1720 2253 2303
DSS Girocheques 325 325, 325
Volume Change {21} i (188) {188}
Price Change 6 i 2 2
Sub Total 310 I 139 139
Other Clients existing & new oo eT a7
Savings on existing 40 40
automation
Sub Total x Ly LL?
Expenditure
Benefits Agency {1889} (2112) (2112)
Girobank 297} (140) (140)
Time Increases (15) {18}
Card Issue/ back office 73 73
Training 23) @
Programmi costs isunk} (4 8) {8}
Programme costs (future) (25) (25)
Fraud (D Seanad Sod
Sub Total NPV before (164) 262 332
supplier charges & risk i
Supplier Charges /Risk {122}
System Charges ~
Benefit Encashment (BES) (145)
POCL {220}
Other oe 77) {36}
VAT. oo ea)
Total NPV (6a) exal (96)
Base PO Tom Harry I Dick *
Case procurement i
Sub Total NPV {164} 262 330 332 332 I
before supplier charges
& risk I
System Charges : (222) = =
BES td {148} (145)
POCL (233. (220)
Other (177) (36) {36}
VAT. i a 27) eaal
otal NPV before risk (ex) Ties; (96)
Assessment of risk = (74) I (7) (20)
Total NPV (161) (it) (iz6) {a6}
Net NPV Change before risk os 124 ae 52 65
Net NPV Change = 50 30 35. 45
* Preferred PFI supplier
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6.
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ANNEX B
NON-NEGOTIABLES
Comment
Acceptable business case for
POCL and Post Office
Customer perceive no worsening
of service
No damage to Post Office brand
POCL retains control of critical
operations and key commercial
relationships
Capability for POCL to automate
all clients and develop new
services
Automation of all post offices
within reasonable time
Chosen supplier has financial and
technical ability to develop and
deliver services
The business case shows a comparative
positive NPV of £45-65m at a 12%
discount rate
The proposed solution’s impact on.
transaction times within acceptable
bounds
There is no immediate evidence that
PO brand damage will occur
Achieved
Achieved
All post offices should be automated
within 3 years
Evaluation conclusion is that these
conditions have been met
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ANNEX C
RESTRICTED ~ COMMERCIAL
MINUTE FROM BOB PEAPLE TO RICHARD DYKES AND PETER
MATHISON, COPIED TO PSC MEMBERS
Purpose
1. The t minute is to inform you of the
substance of the meeting of the Evaluation Board which I
chaired yesterday to consider the repart of the
evaluation team on the re ders submitted by #Tom, #Dick
and #Harry.
2. You will recall that the PSC approved the creation
of a Procurement Board to oversee the procurement
process, give guidance on policy issues and approve the
gy by which the evaluation and selection for
ual award would be conducted. In
ted form as an Evaluation Board it
of the work done by the
reach a selection decision.
imously agreed that if a contract is
hould be made to #Dick. I shall be seeking
this decision at its meeting
oOmorrow.
ations to Tender (‘IT
atisfied itself that all t
Bs chieved at least a satisfactory
performance in a number of areas that had been identified
as being essential to the award. These were ciosel
linked to the sponsors’ objectives in launchi ng this
procurement:
a
fa
he minimum service requirements acceptable to
Ship with
tunities
be. the minimum requirements for x
POCL in the development of new busines
atisfactory arrangements on a number of
n cial aspects feng. an acceptable funding method and
financial struc
dy no outstanding ‘show stopper’ eh
from examination of the prospective service
from the contractual negotiations;
. On two hurdles a ‘forced clearance’ was imposed
gh contract conditions included in the 7
q
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aA. sufficient transfer of risk to satisfy the
conditions of the Private Finance I lative, especially
in the area of fraud, w ea minimum acceptable level of
fraud risk transfer was imposed. Following from
bb. a draft contract acceptable to BA and POCL.
ssued an Invit
rs on this bas
bruary we
tion to Tender
fom
#Dick
#Haxrry
total of five bids from
priced at a level wh
prices given with thi
i into question the ability
a convincing business case.
original prop
of either BA or POCL to mow
advice, the sponsors agreed that
the negotiat ing team “shoul, d have discussions with all
hree suppliers under the EC Negotiated Procedure with
he aim of drawing out the main cost drivers and
identifying possible changes in terms and conditions
would offer better value for money and prices at a
level that business cases wo
cussions generated a list of options for
ther with illustrative reductions in price
and (where rele offsetting impacts on in-house
costs. Sponsor directors reviewed each item of the list
and ace those ch nges which offered the prospect of
without compromising business,
- commercial requirements.
9. The dis
change,
6 April Invitations to Retender (‘ITR’)
i ions were issued to the
trong preference for a retender
essed. However, we said
e supplier wished,
cted by sponsor
sate all retenders.
including
directors.
The evaluation and its results
ll. Retenders were received on 22 April ~ one from each
supp rc. All were variants, but the degree of non-~
compliance with the ITR varied widely. The instances of
non-compliance included some wh i
msors had
not previously
s
previously rejected and some which had
come forward for consideration.
to
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12. The Evaluatio
by referenc o the various streams of evaluation. The
e of each stream,
x and the findings from it, are
detailed below.
13. Technical ~ to check that noth
affected the acceptability of the pre
of This found ne rea y
offerings should be regarded as failing below
Le ors. A good deal of work would
re vy supplier were chosen to devise
op i the fraud area, especially given
P
some of the change raposed by #fom and #Harry which put
more responsibility onto the sponsors’ staff than had
previously been assumed.
14. Contracts ~
ETR and reach a conclusion on
review ranked the suppliers in the order #Dick, us
dered that #Harry should not be awarded
the contract at any price, because of its unacceptable
degree of non-compliance with contract requireme
#Tom’ s rv was de ent against several key
cont reguirements. Whiist this was insufficient
te taking at any pr Of would t ave
bo a considerable price advant
5. Risk Transfer ~ to look at the ove
reach a view on potenti PFI clearan
its importance to both sponsors, to look in
lat fraud risk. The suppliers’ sition on
ised by the
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x elements of PFE risk transfer was sur
lew ne following tabl
Supplier fliaery Wom Dick
PFE Risk Transfer
t Fran Risk Transfer 7 ¥ 7
‘Omus of proofon Authorities. I Tight limit of £10m pa for non
No cardhwider verification cardholder verification fraud.
firasd, Zera for cardholder
No cover far unastioned stop I verification.
I notice, I Onus of proof on Contracting
Authorities I
2 Commissioning ¥ v ¥
Risk in delays ete.
x ‘Volume Change Risk x x
Requires voutne verification I Reqsires 92% of revenue to I Relief for changes to benefit
at end of year f of roltout, be guaranteed. frequency. This is
avceptable,
Es Inflation i x x v
RPI-1% pa aifered, RPT protected, Bears RPL increases up to
Charges will increaae Charges will increase 6%: share these above 6%
with Authorities,
3 ‘Operate the system to agreed x «
standards Limit of £m ja and £0.59
pet single event te penaltics
for service failure,
{
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16, The veview had concluded that the deal with #Dick
was close to risk transfer sought and would secure
PFI clearance arry was prepared to accept
the condit ociated with =:
tion and RPI linkage made the ri
transfer position less cl cut. The risk transfer in
#Tom’s tender would be unlikely to satisfy
requirements of PFI and the deal was more akin to an
operating lease.
17. noted in
important to under:
Kk transfer, The
wing tab
it was considered particularly
y the position on fraud
ew had produced the
ng the key offerings by the
rea of Potential Loss. ene _ Service Provider Cover: (00:
Benefit card £ 200m over contract £10m pa. I £200m over contract lifetime
I iifetime.
Hacking by Supplier's
employees or external Uird
parties.
‘Un-actioned stop notices NIL £10m pa £200m over contract lifetime
Counterfeit Cards used with I £200m over contract NIL £200m over contract lifetime
valid accounts lifetime.
‘Use of unreported stolen NIL NIL. with verification I £200m
cards screens over
contract
lifetime
standard screens I Nil
False repudiations NIL. NIL if shown to be Nil
false plus
standard
procedures
ifnot shown to I £200m
be false, or if over
verification contract
i i screens used I lifetime
BA/POCL Internal and/or NIL NIL NEL
collusive fraud
Other fraud (POCL) NIL. NIL £200x over the contract
lifethne
te the total cost (i.e.
nal costs} of taking the
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fh
18. Financial ~
supplier changes
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service for BA, POCL and overall. This evaluation, having
co jered both direct and indirect cost cations,
had shown the cost of serv
virtually equal. While ¢ lysis showed that
had a slender lead th ition was reversed when
tment was applied for some areas where it had net
possik to complete definitive costing (i.e. the
on-costs of bearing the burden of proof and the
prospective savings achievable by purchasing receipt
stationery from a so @ other than the supplier}.
#Harry was significantly more expensive than the other
two's
Figures in £m ~ full life, 6% NPV #Tom #Dick #Harry
BASSSA total 623 - 658 627 - 663 B47 ~ 882
POCL total 403 378 410
Total costs 1826-1061 1005 - 1041 1287 - 1292
Ranking of financial pesition I= l= 3
for some areas # k was the
cheapest. analyses (e.g. variations in
workload} > hat because #Tom’s charges varied
least with volume, a reduction in volume produced a far
less than co Surate reduction in charges.
19. With
- Value Factors ~ to review supplier performance
ainst a number of non-monetary value factors which we
had told suppliers would be taken into account in the
evaluation. This had shown a close match between the
three suppliers in terms of the ‘external’ factors
affecting staff and customers {e.g. customer
acceptabili , the order within that being #
and #Dick.
the acceptability threshold on
covering the soundness in terms of
service delivery and coherence, fraud-
free method of payment) the order was again #Harry, #Tom
and #Dick, with the £ & two being some way ahead of the
third. The trend since issue of the ITT had been for
#Dick to improve in some of these areas, e #Harry and
om had declined.
22, Partnership ~ ti
partner for POCL
review hac conclu
satisfactory pote:
e ability of the suppliers to be a
g future new business. The
il three suppliers were
partners.
* POCL note: the numbers inchide adjustinents to enable comparisons to be made on a common basis
without including the full impact on POCL’s or BA’s business cases. They are, therefore,
reconcilable, but not identical, to the numbers in POCL’s Business Case.
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Evaluation Board discussion and conclusion
The Board identified a number of aspects of the
ation and its findings on which they needed
mation. Members of the
for such an eventuality, and
hold immediate discuss:
received on all of the
ns. Satisfactory answers were
sues that were vaised.
24. The Board then considered the findings of the team
and the results of the related discussions in relation to
was to conclude * #Harry
further consideration. It
ters and was thought to be
was signi antly behind the
bid was ded by the
tracts Ass % as unacceptable.
it been unable to mak the large n
sponsors had previously
a large number of pro
25. Their fi
should be e1
ranked f
on
that would
enak rry toe increase the costs to sponsors very
substantially over time.
6. its tender showed a cost of ervice
virtually e to #Dick. It had achieved a satisfactory
marking on Both categories of value factors, and was
ranked y
second to #Har on both.
®
However, there were significant ortcomings in
8ton’ s tender arising from the Contracts and Risk
Transfer assurance activ est
a the con racts review had recommended that #Tom
needed a si ant cost advantage to be preferred to
#Dick. Generally, its contract offered less certainty
than #Dick! s, with elements left open to interpretatio
Its provisions on what were considered @ key elemer
remained umattractive/unacceptable and had been rejected
in the past by sponsors. In addition, it offered the
deal on fraud risk transfer.
b the Risk Transfer review had concluded that the
#Tom bid would not be regard as acceptable in PFI
more in the n operating lease
e bulk of the risk volume, RPI and fraud
ing with the Contracting Authorities.
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nerefore concluded that #Tom should also
2 consideration.
28. The Board
be excluded fr
29. #D
#Tom on
conserva
s t
not been possible to
nm Dick's favour.
eriteria.
30. closest to what the
Spo: ts implications were
far fw Its provisions on
frau were the best on offer, and the view
ef t review was that onl, considerable
pric tage could alter its r. as the most
rractive bid. The Risk Transfer j had concluded
© ye
works
@ te
would be regarded as
. #Dick was close to th rs on the
nutward-facing’ value fac Whilst were some
of the ‘inward-facing’ value factors where we
: looking for improvement post-award, a
e had nonetheless been achieved. #Dic
sa sati future partner for POCL
future new
au
or
£m
Qe
nr GO
hE
@ oo
iness.
bu
ard therefore unanimously concluded that,
subject to clearance of sponsor business cases, the
contract award nuld be made to #Dick.
33. The Board recognised that an award to #Dick would
L need for a proactive management stance by
notwithstanding the improvement noted by t
immediately
closely wi E nm measures,
given the c ges on fraud risk made by the
bidders in their retenders most of this work
red whichev i were chosen.
Recommendation
I shall
he decision of
strongly recommending tomorrow that PSC
he Evaluation Board to award the
to #Dick. ement process has been
and fair ¢ the view of the Board the
fa
ry
iy
a
®
o.
Ey
ilenge from
gainst