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EEA
Pt 2)
SBS
Review of the Benefits Agency/Post Office Counters
Automation Project
Working Group Report
July 1998
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Contents
1 - Summary and conclusions ,
2 ‘ Introduction
°3 Key issues
3.1 The Independent Panel's assessment
3.2 Prospects for paying benefits by ACT
3.3 Prospects for developing banking and other services across PO counters
3.4 Role of PO counters in providing wider government services
4 Options for the future
4.1 Summary of the options
4.2 Feasibility of the options
4.3 Implications for Benefits Agency/DSS
4.4 . Implications for PO counters
4.5 Financial implications
4.6 Implications for ICL
4.7 Presentation and handling
5 Annexes
Benefit payment
Post Office counters network
The cost structure of Post Office Counters
The project
Recent Ministerial statements
Legal advice
Analysis of financial flows
A AWMIUAWDY
Report of the Independent Panel
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1. Summary and conclusions
1.1 This is the report of an interdepartmental review of the‘PFI project in which ICL Pathway
have contracted with Post Office Counters (POCL) and the Department of Social Security
(DSS) to automate post office counters including facilities for payment of benefits using
a benefit payment card (BPC). The review was commissioned because of concems,
particularly on the part of DSS Ministers, that the project was badly behind schedule, over-
budget and indeed might not be viable. We were asked to consider:
Bai
- whether the project is technically viable; and if so, how quickly it can be
completed and at what cost to government;
- the direct and indirect costs of cancellation and of any alternative available to
z deliver the project’s objectives.
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1.2 We set up an Independent Panel of experts to address the first question. Their view is that
5 the project can deliver the functions expected of it, but is unlikely to be operating
nationwide much before the end of 2001, some three years later than originally planned.
Successful delivery would require renewed commitment from the parties and urgent
measures to improve project management at POCL and resolve outstanding issues, and
is not without risk. The cost of continuing is uncertain: delays and cost overruns mean ICL
Pathway will make a loss without a significant extension of the life of the project or an .
increase in charges (last year they were looking for a 5 year contract extension or 30%
more money). Neither is attractive and EU procurement law precludes substantial changes
2 in terms.
1.3 The direct costs of cancellation are also hard to predict. ICL Pathway are formally in
3 breach of contract as result of missing a key milestone, and DSS/BA and POCL believe
Pa this would provide sufficient grounds for termination and indeed for claims against ICL
Pathway of up to £200 million. But ICL would vigorously contest this and almost
B certainly claim against BA/POCL for up to £335 million. The BA/POCL programme
is lawyer believes the Government’s position is strong, but any litigation would inevitably
be messy and uncertain. Indirect costs of cancelling the project depend on what is put in
its place. DSS have long regarded payment direct into bank accounts by automated credit
transfer (ACT) as the preferred means of payment in the long term. But this would
deprive POCL of its largest source of income and so threaten the viability of the PO
network unless the income could be replaced. .
1.4 Against this background we think the choice for Ministers lies between three options:
1 Seeking to continue with the project; negotiating with ICL over a limited
& extension, perhaps to 2007; making plans for a three year transition to benefit
A payment by ACT completing by the end of the contract; and using the platform
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provided by this project to develop banking and other services across PO counters;
Reshaping the project by cancelling the benefit payment card and seeking to
develop the remaining elements of the programme to give POCL a banking
capability; moving to ACT at a rate which takes account of POCL’s ability to
provide banking services, and so retain as much as possible of the benefit payment
business; and redirecting administrative savings in BA to supporting POCL for the
life of the current contracts; and
Terminating the whole project on grounds of non-performance by ICL Pathway;
developing alternative plans for automation of PO counters; moving to ACT at a-
rate which takes account of POCL’s ability to provide banking services; and
providing some subsidy while POCL plans changes to the network.
The decision will have far-reaching consequences for the way benefits are paid to around
19 million people, and for the viability of the Post office network. Key considerations in
deciding between these options are:
What is the best way of paying social security benefits? Current paper based
methods are inefficient, prone to fraud and hard to audit. The BPC will save
perhaps £110 million a year on fraud and allow proper auditing, but will cost about
the same to administer as the current system. Payment direct into bank accounts
by ACT (already used by 28% of claimants) would deliver all the main benefits
of the card but cost around £400 million a year less for BA to administer and
would provide a better platform for welfare reform. For these reasons we agree
at some point in the next 10 years it should become the normal method of benefit
payment;
What is the impact on the post office counters network? The central dilemma
is that 80% of BA’s administrative cost in paying benefits is income for POCL,
and that income, together with the steady flow of claimants through post offices,
is vital to the commercial viability of the network (97% of which are run as private
businesses). Any significant loss of BA income which was not replaced by
subsidy or revenue from other sources would mean widespread closures. POCL
estimate that if all the BA income were lost, up to half the current network of
19,000 offices could close, and the remaining offices would need a subsidy to stay
open. This is a highly sensitive issue, not just because these offices represent the
livelihoods of self employed sub-postmasters (who have invested around £1 billion
in the network) and their staff, but because people value access to a local post
office and associated shop;
Could post office counters provide cash to claimants who get benefits paid
into bank accounts? This would suit BA/DSS because they would like to offer
claimants the option of continuing to collect their cash weekly from the PO; and
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it might help POCL because it would provide some income and a continuing flow
of customers. It is certainly possible: POCL already provide banking services for
customers of the Co-op Bank, GiroBank and (on a trial basis) Lloyds/TSB. They
could seek new partners, but to do this effectively on a large scale, they need new
technology, either the ICL system or another. But we need to be realistic about the
implication for POCL. Once benefit money is in claimants’ bank accounts they
may well find it more convenient to draw cash from a bank branch, cash machine
(ATM) or retailer’s cashback facility;
a - What role is there for post office counters in the long term? POCL cannot rely
3 on current sources of income to sustain it through the next decade, and in our view
has been slow to develop a business strategy which addresses this challenge. The
Fe PO is pinning its hopes on providing a range of banking and financial services
oa across counters, and becoming a ‘front end’ for more Government services. We
BA] see some scope for both (particularly for banking), but think it is very doubtful
cd revenue from these sources could offset loss of income from BA. If that is right,
“ the issue of scaling back the network or providing significant subsidy will have to
be faced at some point whatever happens on this project. Option 1 postpones it for
3 a few years and gives PO a better chance to build new sources of income;
a - What are BA and POCL’s contractual obligations and the costs of
3 termination? We are not starting with a blank sheet. All three parties are tied in
by contract, and have sunk costs in taking the project this far. Continuation would
- require a difficult negotiation with ICL on timetable and costs. The Government’s
aim in any such negotiation should be to offer the minimum concessions necessary
to give ICL an incentive to continue without litigation (even if they make a loss
on the project overall). On the other hand, BA and POCL believe ICL have put
themselves in breach of contract and they are entitled to withdraw and seek
damages from ICL of up to £200 million (an independent report by Project
Mentors provides some support for this view). ICL would contend with equal
force that BA and POCL share the blame for the delays and if the government
parties withdrew they would seek to recover the compensation the contracts
provide for (up to £335 million in the event of termination ‘for convenience’). The
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. Programme lawyer’s view is that the Government’s case is a strong one, but any
= litigation would inevitably be messy and uncertain;
- What are the costs to government of continuation or cancellation? There is
3 unfortunately no simple answer to this. An early switch to ACT has the potential
oS to bring forward large efficiency savings for DSS/BA who need to consider
carefully their responsibility to deliver value for money. (Improved fraud control
$ can be delivered under all the options.) However savings to BA would be offset
id by losses to POCL and the increased costs of maintaining a nationwide network
a of post offices. The impact on the public sector as a whole depends critically on
s assumptions made about income POCL could generate from financial services
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under each option. There is therefore no clear basis for choosing between the te
options on cost grounds, but options 1 and 2 look a bit better than option 3. In each 8
case there are implications for DSS funding which will have to be resolved with ~
the Treasury.
What would be the impact on ICL and the UK computer industry? Failure of
the project would undoubtedly be very damaging to ICL and might even bring the
company down. ICL have 270 staff working directly on the project, and hope to
market their system overseas. Fujitsu has plans to float ICL by 2000 which would
be set back.
What are the implications for PFI? This is one of the biggest PFI projects. Any i
move to shield ICL from the risks it took on would make it more difficult to baa
achieve effective risk transfer on other projects, and could risk challenge from *
bidders who lost out in the original procurement process. It could also encourage -
ICL to come back for more money later. There are parallels with the National
Insurance Recording System (NIRS2) project which has also suffered delays. In “
that case Andersen Consulting has been expected to swallow serious losses, and
indeed to compensate the department for the delays.
How does the project link with wider government objectives? An early move ™
to ACT would help promote electronic delivery of government services and -
‘universal banking’ by bringing into the banking system the estimated 2.5 million
claimants who currently do not have access to a current account. This would in
turn help tackle social exclusion by giving these people access to a range of
services which are part of normal life for most people. Post offices also have a role
in providing services locally, often in villages or on estates where there may be no
other shop; and could play a growing role in future in providing an access point
for government information and electronic transactions with government.
What are the legal constraints? In broad terms we cannot vary the terms of the &
contract in a way that would allow a disappointed bidder to claim they would have
won the competition on the revised terms and were therefore treated unfairly; or
would allow alternative suppliers to claim they have not had the opportunity to bid
for new work. This limits what could be offered to ICL to continue.
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How will this look to the public and benefit recipients? There are tricky
problems with presenting each option. With option 1 DSS will need to take 19
million claimants through the upheaval of switching from order books to cards
with the prospect of a second switch to ACT a few years later (although this
could be a switch from the payment card to a similar bank card). Options 2 and
3 will immediately raise fears for the future of the post office network; and for
claimants will mean losing the option of payment in cash sooner than under option
1. Such fears will no doubt be orchestrated by the Federation of Sub-Postmasters,
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CWU and rural lobby. But in each case a reasonable account could be given of
steps being taken to protect the network.
1.6 Tosum up on the options: °
- Option 1 will involve ICL swallowing substantial losses. If it can be delivered,
Rg it has the advantage that it secures the PO network until around 2007; and gives
a POCL more time to try to build new business and banking facilitiés to replace BA
income when the contract ends. It avoids the prospect of protracted and costly
3 litigation which could follow cancellation of the.project altogether. On the other
a hand it means foregoing for several years the substantial efficiency savings
~~ (around £400 million a year) available to BA from moving to ACT; it involves two
3 upheavals in the benefit payment system in the space of just a few years; and could
well involve a formal direction to the BA accounting officer.
3 - Option 2 costs about the same overall as option 1(on our modelling). DSS/BA
- believe it would give them more clarity of purpose. It could be presented as taking
z forward a range of Government objectives including positive steps toward
3 universal banking. It would involve only one upheaval in the benefit system and
could deliver substantial efficiency savings for BA a few years earlier than option
Pay 1. It could help ICL by making the project more deliverable, however it is not clear
gq that there is the basis for a commercial deal with POCL on a stripped down
project. The option seeks to protect the PO network from any dramatic short term
dip by re-directing BA savings to supporting POCL, however loss of ‘footfall’
income from claimants would hit sub-postmasters and POCL bringing some ,
closures. The faster pace of adjustment would worsen POCL’s medium term
prospects.
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- Option 3 offers the same benefits to BA as option 2, but complete termination
would be more damaging to ICL who would be more likely to pursue claims
against both POCL and BA. This would be messy and uncertain. POCL would be
starting from scratch in developing counters computerisation, and the delay could
bea serious blow to its business prospects. It would also be a setback for National
Savings who are counting on counters automation to reduce their administrative
o costs. On the other hand POCL could invest in the latest generic banking/retailing
systems which on their own are likely to be considerably cheaper than a system
built around the requirements of the benefit payment card; and limited front end
banking services could be offered quickly.
Sake
Recommendations
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1.7. Nooption is without difficulties, but each looks doable. The Working Group, apart from
DSS and the Treasury Social Security team, recommends thats
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- in line with option 1, ICL Pathway should be given terms for continuing with the
project: there can be no increase in the level of payments already contracted; we
are prepared to discuss an extension of contracts, but only to ensure a5 year period
of operation following full implementation; and there will be penalties if
completion of roll out is delayed beyond September 2002;
- if ICL agree to these terms, the measures proposed by the Panel should be
implemented forthwith. In particular a ‘troubleshooter’ should be appointed to
work with the three parties; and POCL's management of the project must be
strengthened;
- if ICL cannot accept these terms, or if the negotiations cannot be satisfactorily
concluded within two months, Ministers should sanction the public sector parties
withdrawing from the contracts on the grounds of ICL Pathway’s non-
performance and we should implement option 3.
- POCL senior management needs to be strengthened, ideally by bringing i in
someone with a good track record in running a retail network.
DSS recommend a similar approach with cL, but based on option 2. Treasury Social
Security team prefers option 3.
Whichever option is chosen, it is important that Ministers should give an early steer. We
can provide more detailed advice on handling once the broad way forward is clear.
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2 Introduction
Background
2.1 The BA/POCL automation project (which POCL refer to as the ‘Horizon’ " project) was
initiated in 1993 with the aim of:
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- providing a more secure and efficient way of paying benefits, with potential fraud
savings of £185 million a year (of which around £70 million is now being saved
by the Electronic Stop Notice System);
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- providing the DSS/BA with the means to account fully for their vast programme
expenditure, now nearing £100 billion a year;
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- automating PO counters, to make current business more efficient and help them
win new business. The project also helped to secure the PO network by providing
a secure revenue stream from POCL’s biggest customer until the middle of the
next decade.
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2.2 A contract worth around £1 billion was signed with ICL Pathway in May 1996. Itis a
i huge project, involving automation in 19,000 post offices and 40,000 counter points, and
providing links into DSS/BA and PO systems. The project is described in more detail in
Annex D.
2.3 Arevised timetable for the project was agreed by all parties in February 1997. Since then,
it has slipped 21 months behind schedule. The two public sector parties attribute the cause
of the slippage to ICL Pathway in all material respects (based on an independent review
of the programme by consultants Project Mentors). In September 1997, DSS Ministers
became sufficiently concerned to draw this to the attention of Treasury and DTI
colleagues, and discussions took place between the three parties, facilitated by PA
Consulting, to see what could be done to minimise the delays. On 21 November 1997, a
key milestone was missed by ICL Pathway for completing an operational live trial, and
the public sector parties placed ICL Pathway in breach of contract. Since then there have
been further delays to the programme, and ICL have sought extensions to the contract or
BE increases in charges. In May this year, DSS/BA issued a notice of ‘cure' to ICL Pathway,
we in order to protect their negotiating position.
Fa The review
2.4 Against this background, the Secretary of State for Social Security wrote to the Prime
Minister in February that ‘there is a serious risk that this project will fail to deliver its
objectives - or will not do so within a timescale that will make it worthwhile’. She
proposed early discussions to find an agreed way forward, emphasising the urgency of a
decision in view of the continuing fraud losses to DSS and the need to agree new
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timetables with ICL if the project were to proceed. DSS was concerned that, since it .
guarantees a minimum level of payment to POCL, it in effect carries much of the financial Eg
risk on the project and feels the effect of delays in a way that POCL do not. .
2.5 In response to later correspondence the Chief Secretary proposed that before decisions 6
were taken, an interdepartmental working group led by the Treasury should be asked to
prepare an agreed analysis of the options, including an assessment of: Fra
- whether the project is technically viable; and if so, how quickly it can be -
completed and at what cost to government; ia
- the direct and indirect costs of cancellation and of any alternative available to -
deliver the project’s objectives. 2
i
This approach was agreed by other Ministers. This report is the result of that work. ~
2.6 The Working Group was made up of officials from the Treasury, DTI, DSS and the &
Central Information Technology Unit. The Group set up an Independent Panel under the fa
chairmanship of Adrian Montague, head of the Treasury’s Private Finance Task Force, and F
assisted by PA Consulting, to provide a thorough and balanced assessment of the technical ~
viability of the project, and its likely timing and costs. Other members were Alec Wylie =
(former head of the Norther Ireland Social Security Agency) and Bill Robins (former
Director General of Communications and Information Services at the MOD) both of
whom have substantial prior experience of large IT projects. Their report forms Section z
6 of this report.’ .
Structure of the report z
2.7 The structure of the report is: :
- Section 3 reviews key issues to be considered in assessing the options; .
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- Section 4 analyses three broad options against a range of criteria; &
- Section 5 contains a set of background notes on specific issues; §
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- Section 6 is the report of the Independent Panel. °
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3 Key issues to be considered
3.1 The Independent Panel's assessment
3.1.1 The Pariel’s report forms Section 6 of this report. The Panel was asked to consider three
main points:
- whether the project is technically viable;
_- when it could be delivered;
and at what cost.
3.1.2 In addition to examining these questions the Panel identified a number of fundamental
“strategic issues (such as the ability of POCL to manage this large project) which are
fundamental to the programme and says there is a severe risk of failure if they remain
unresolved. Resolution depends on renewed commitment and cooperation from the parties.
3.1.3 The Panel also considered with the parties a number of possible ways forward.
Technical viability ,
3.1.4 The Panel has concluded that the project is technically viable, although there are some
risks, in particular around:
- scaleablility and robustness. The programme is probably the biggest ofits kind and
the system has had to be tested at the level of its component parts. The Panel is
Satisfied these risks are being well managed by ICL Pathway, but they nevertheless
Temain.
- the system is (necessarily) heavily dependent on a third party ‘middleware’
product called ‘Riposte’. Ic Pathway have taken steps to cover their dependency
on this product. *
3.1.5 The Panel also believes the basic infrastructure is very robust for the future and is
, generally based on industry standard products. It should therefore allow POCL to compete
for new business in a variety of markets, and for example develop new applications based
on smart cards. If significant on-line capacity was required more development work may
be needed.
3.1.6 The Panel has seen no evidence to suggest that the systems being developed by BA and
POCL to.connect up to the systems being developed by Pathway will not work as
tequired.
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Timetable and risks
3.1.7
3.1.8
!
Cost
3.19
The original timetable was that roll out of the full system in post offices would start in
June 1997. The February 1997 re-plan put this back to January 1998. The current timetable
would see it start in April 1999. The Panel’s best estimate is
~ that there will be a further 9 months delay to January 2000, in the start of roll out;
but to make this possible, a number of outstanding issues on the critical path
would have to be resolved fast (by the end of July). These issues are not
considered to be insurmountable and indeed are expected to be resolvable easily
provided the parties cooperate. The date could be brought forward with
commitment and goodwill on both sides;
the roll out programme should be finished within 21 months (by September 2001).
This requires offices to be brought into the system at a rate of 300 a week. The
Panel believes this has been properly planned and is sustainable but notes there are
some risks around the timetable and the response of POCL’s regionally based
organisation to the demand placed on it.
The Panel has made a number of recommendations on how the project should be managed
to deliver this schedule. These involve early resolution of outstanding issues and
strengthening the Horizon Project Office (set up by POCL) and POCL management. The
Panel also proposes appointing a neutral Government “troubleshooter” directly responsible
to DSS and DTI ministers to help take the project forward. (This would require careful
handling: DSS are concerned about possible conflicts with BA’s accounting officer
responsibilities; DTI would want the relationship with the PO Board to be looked at
carefully). The project would effectively need to be restarted with renewed commitment
from all parties.
The Panel reports estimates provided by the parties: the direct cost of the extra nine
months delay will be £90 million for BA (in the cost of running existing systems etc), £15
million for POCL and £72 million for Pathway on top of costs already incurred. In
addition BA lose fraud savings of around £110 million a year until the card system starts.
3.1.10 However the the Panel does not provide an estimate of the likely cost to Government of
reaching agreement with ICL on terms for continuation of the project. At the end of last
year ICL sought an extension of 5 years or 30% more money. This is a negotiating
position, but the subsequent delays will have worsened their financial position. Our own
very rough estimate is that even if the contract is extended to restore a5 year steady state
period of operation, ICL might face a shortfall of the order of £250 million. Our view is
that the cost of continuing will depend on the outcome of negotiations with ICL. We are
under no obligation to ensure ICL makes a return, or even breaks even. But if we want the
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: , project to continue, ICL will need to be in a position where they judge the losses on the
3 project are bearable and retums from continuing outweigh the likely return from
withdrawing and suing.
5
3 Options
Ee _ 3.1.11 The Panel explored a number of options with the parties to see if any could command
2 broad support. These are set out in an Annex to the Panel’s report. :
i
a 3.2 Prospects for paying benefits by ACT
“ 3.2.1 To put the project in perspective, and understand the alternatives, we need to look at
5 different ways benefits can be paid, and in particular at the option of paying direct into
8 claimants’ bank accounts by automated credit transfer (ACT).
3 Background
3.2.2 Of the 27 million benefit claimants, around 19 million.are currently paid using paper
4 based methods across post office counters (order books or Girocheques) and 7 million
a . arepaid by ACT. The proportion paid by ACT has been rising steadily from around 16%
5 years ago to nearly 30% today. It is expected to go on rising by around 1 percentage
5 point a year, since around half of new pension and child benefit claimants opt for ACT.
* The project will move the 19 million using paper methods to the benefit payment card
(BPC). Annex A sets out more detail on payment methods.
“ 3.2.3. ACT has a number of advantages:
- it is very much cheaper for BA than other methods, costing less that 2p per
transaction compared to 47p for order books and 78p for giros. It is also cheaper
than transactions using the BPC. (It should be acknowledged that it is cheaper for I I
BA partly because the cost of providing cash to claimants is transferred to the
banking system.)
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3 - it cuts opportunities for fraud (as does the BPC);
a = it is a widely used generic system which allows DSS to ‘piggy back’ on wider
¥ technological change.
4
4
3 - 3.2.4 For these reasons, the DSS have long seen ACT as the best long term solution for benefit ~
2 13
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- it gives BA a full reconciliation of transactions (as does the BPC);
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payment. However there have been three main obstacles to adopting ACT as the standard:
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- around 2% million claimants do not now have access to current accounts;
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- there are 16% million people who do have access to accounts but do not choose
ACT and may resist the change, for example because they find it most convenient
to get their cash from a post office, some for mobility or health reasons; =
- the loss of business would threaten viability of many post offices.
3.2.5 We consider these issues in tum:
The unbanked p
3.2.6 Research by DSS, backed up by recent research by the British Bankers Association
(BBA), suggests that around 90% of benefit claimants now have access to a current
account at a bank or building society, leaving only 10%, around 2% million people, =
without access.
3.2.7. The BBA research suggests that the great bulk of the unbanked choose not to have
accounts and are not unbanked because they have been refused or would be refused a =
bank account. The unbanked include: ba
- young people who have not yet opened an account;
om
- people with limited funds who prefer to retain the control over their finances that
a cash budget gives them; id
- elderly people who may be unfamiliar with banking. .
3.2.8 They will also include: b
- people who have been, or would, be refused accounts because they cannot produce: i
the standard identity required by banks, or who have poor credit records;
- people who wish to avoid the banking system for illegitimate reasons - to avoid i
tax, to defraud the Benefits Agency etc.
ees
3.2.9 Most banks now offer simple credit only accounts which provide a bank card for
withdrawals but do not allow overdrafts. Some banks only offer these accounts to
particular groups (for example 16 to 19 year olds); other banks apply no such restrictions.
reat
3.2.10 This suggests that if the currently unbanked were given suitable notice that they would
need to open an account in order to receive their benefits, there would be no practical
roe
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difficulty for most of them in them doing so. (They may of course be resistant to this for
other reasons.) Those who are unable to open a full account would in most cases be able
to open a credit only account. Inevitably there would be a number of people who could
not open accounts for example because they have no fixed address, or suffer from mental
illness. As under the BPC proposal, special arrangements would have to be made for these
people.
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3.2.11 However it is not clear how the banks would react to a large number of people - mostly
on low incomes and some of doubtful creditworthiness -. being required to have access to
g a bank account to receive their benefit. Banks may respond for example by introducing
a new charges for withdrawals. Discussions with the banks will be required, but informal
soundings by DSS suggest that at least two major banks would be interested in developing
a their services in a way which meets the majority of DSS customers needs. The costing of
EI
options set out below includes as a contingency a sum of £30 million a year to provide an
g incentive, although this may well not be needed.
. Will claimants with bank accounts accept the switch?
= 3
by 3.2.12 DSS research indicates that many benefit recipients want a method of payment which:
- allows them to collect payments in cash, and budget over a short period;
- allows local collection, typically from the post office;
- for poorer people, allows frequent (weekly) payment of small amounts;
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Bs ~~ does not require them to collect all their benefit due at once (as the BPC does).
“ Claimants tend to use different benefits for different things eg. using one benefit
3: order book to "save up"; and do not like the responsibility of handling large
3 amounts of cash.
a 3.2.13 Using a bank account to draw social security benefits may not be attractive for some
= - claimants because:
- most bank accounts provide fewer access points for cash than there are post
offices. So people may have to travel further to get their cash which may be a
problem in rural areas and deprived urban areas, and for the less mobile.
- ATMs (automated teller machines) only provide cash in notes not coin, so a
benefit claimant may have difficulty withdrawing all their benefit without going
into overdraft;
- many people find bank accounts and bank machines intimidating and prefer the
familiarity of the post office and the ease of controlling budgets in cash;
sealed
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- the timing of payments through bank accounts may be unattractive. For example g
pensions paid by ACT are currently paid monthly in arrears, while order book
payments are made weekly in advance.
3.2.14 Each of these issues can be addressed:
- the number of outlets for cash is growing rapidly. There are now ATMs in over
10,000 separate locations, and many supermarkets offer bank accounts and
cashback facilities. The Post Office itself now offers banking facilities to
customers of three banks. In the near future cashback arrangements are expected
to spread rapidly to shops, garages and pubs. (Terminals are available for rent at
around £15-30 a month with a charge to the retailer of 10-25p per transaction.)
ver
- many people have become more used to using bank accounts with the rapid switch
from cash payment of wages to payment by ACT which took place in the 1980s.
Spreading the banking habit further would fit well with Government’s objectives
for tackling social exclusion, encouraging savings, and encouraging people to use
the most moder and efficient means available to conduct transactions. _
- DSS will be looking at the options for adjusting the “periodicity” of benefit
payments to remove any deterrent to switching to ACT.
3.2.15 These changes will tend to make ACT more acceptable, but DSS believe that the most
significant step towards making ACT an acceptable solution for claimants would be to
provide for them to withdraw cash from their bank accounts at post offices. POCL already
provides this service (using inefficient paper based methods) to customers of the Giro
Bank, Cooperative bank and (on a trial basis) Lloyds TSB. But providing such facilities
for millions of claimants would require investment in at least some simple banking
technology. We consider below the scope for POCL delivering this, either through the
Horizon project or some other system. . =
3.2.16 Clearly if this were achievable, it would offer the Post Office the chance to generate some
income from banking services to replace, at least in part, that lost from the Benefits
Agency when it switches to ACT.
How long would it take?
3.2.17 DSS envisage that the process would involve around three years of preparation and three a :
years of transition. In the preparation phase DSS would:
&
- draw up plans for a benefit by benefit migration to ACT; . £
- Tun a publicity campaign to encourage voluntary take up of ACT, explain the Fa
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transition and offer help with opening bank accounts;
~ take the necessary secondary legislation to make ACT the standard method of
, payment except where individual claimants can show they cannot open a bank
account or ACT would be for some reason unsuitable;
- continue discussion with the banks about availability of accounts for the currently
unbanked. DSS may for example aim to draw up a list of banks prepared to offer
simple credit only accounts.
- maintain a dialogue with POCL on a timetable for introducing banking services
over post office counters. (DSS wish to involve POCL fully in the move to ACT.)
3.2.18 In the transition phase, the DSS would:
~ set a series of dates after which ACT would be the normal method of payment
(other than for exceptional cases) for each benefit;
- provide continuing support and advice for claimants seeking to open bank
accounts.
- paper based methods (or the BPC) would be phased out as ACT came in.
3.2.19 We agree that ACT is the best long term solution; and DSS should be planning to move
to ACT at some point in the next ten years. The question is when, and whether it is now
sensible to move first to the BPC?
3.3. Prospects for developing banking and other services across PO counters
3.3.1 The main reason why ACT has not been pursued in the past has been that Ministers have
not been prepared to accept the damage to the post office network that would result. This
was a key factor in the decision to pursue the Horizon project. So a central issue in
assessing the options now is how far could POCL replace’income lost from BA by
developing new business such as banking services.
3.3.2 There is an opportunity for POCL to provide:
- banking services to benefit recipients who have a bank account so that they
withdraw their cash over PO Counters;
- _ basic credit accounts (in association with a private sector partner) for the
“involuntarily unbanked” - those who would not otherwise be able to obtain a bank
account;
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- accessible banking services for the public in general as bank branches close.
3.3.3 These services are already provided to customers of the Girobank (in 18,000 post offices),
Cooperative Bank (15,000 post offices), and (on a trial basis) Lloyds TSB (840 offices).
But current paper based methods are inefficient and expensive, and customers cannot for
* example check their bank balance.
3.3.4 To extend the range of services it could provide, the Post Office would need to:
- develop a technology platform; and
- establish commercial partnerships with banks, and get agreement to link their
systems into bank systems.
3.3.5 We consider these issues in turn.
The technology
3.3.6 There appear to be three possible routes through which the Post Office could establish
banking technology; .
- building on the Horizon system. The system ICL are installing can be adapted .
telatively easily to provide a wide range of banking transactions. The investment
would cost around £5 million for additional hardware (keypads) and up to £10 .
million for software development. The main constraints on implementation are
Tesources within ICL and POCL, and getting agreements with the banks to link
into their networks, ICL are naturally focussed on rolling out the benefit payment
card system first. But in principle a banking system based on one partner bank
could be rolled out towards the end of 2001, and with several banks perhaps a year
later. Horizon can support smart card technology, and POCL see development of
a PO smartcard as a central part of their development strategy. ,
- by using the new on-line debit card terminals. Around 10 million bank
customers who are regarded as too risky to hold a conventional debit card now
hold ‘on line’ debit cards (Electron or Solo) which authorise debits or cash
withdrawals up to the limit of what is in the account. The retailer runs the card
through a machine linked to a telephone line which provides on-line authorisation.
A counter clerk in a post office could use it in the same way. This would be quick
and cheap to install (£15-30 per month rental per machine plus transaction costs)
but would support only a limited range of functions, and banks are more likely to
charge retailers for such transactions than to pay for them.
- - holding a new competition for a counters automation platform. It would take
18
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some time to get a fully integrated system in place, but the Post Office would be
able to acquire more generic banking technology, perhaps more cheaply than the
Horizon system (though with more limited functions).
Pay
3.3.7 Each seems a plausible route for POCL to develop the technology for banking services,
=s Partnerships with the banks
3.3.8 POCL envisage that it would not act directly as a bank itself, but would act as an agent for
a and partner with a range of banks. The working group agrees that this is a sensible
a approach. The Post Office would be an extension of the banking system, not a separate
= ‘poor people’s bank’.
Be
Bt
ery
3.3.9 What's in it for the banks? The banks are reducing their branch networks to cut costs but
they still need to provide physical access for their customers for some basic services. The
PO could be attractive to the banks since it is an extensive network, in particular providing
access for those in lower socio-economic groups. (55% of CDEs live within half a mile
of a bank or building society whereas 78% live within half a mile of a post office. Only
9% of rural parishes have a bank or building society whilst 57% have ' post office.)
Furthermore it is an organisation that is trusted by the public.
ad
aiid:
eS
BA
3.3.10 The banks may be willing to put some of their savings from branch closures into the Post
Office to provide coverage for customers that their own networks can no longer achieve,
especially in rural and deprived urban areas, or to discourage customers from visiting their
branches for low value cash withdrawals.
3.3.11 But this is not straightforward. The banks may not view post offices as a suitable interface
with their customers. They may well see the future in the next generation of smartcard
technology and be reluctant to commit to the Post Office. (The Horizon system can
support smartcards, but it would require considerable design and engineering effort to .
enable POCL to offer banking services using the next generation of smartcards.) And.there
is a limit to what the banks will pay for the service.
Benefits for POCL
3.3.12 POCL, drawing on work by McKinseys, have estimated that the revenue streams they
could generate from banking might be:
- £220-270 million from providing front-end banking facilities for existing benefit
recipients migrated to ACT accounts with the High Street banks;
Ea - £20-80 million from existing non-benefit recipient customers of the High Street
ve banks who might choose to carry out some of their basic banking business at post
a offices;
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- £15-35 million from wholesale cash distribution for a few major banks. using their &
current distribution network;
5S
giving a total gross income of £235-385 million a year. &
3.3.13 We regard these estimates as extremely ambitious and the timetable for achieving them =
uncertain. People have a wide range of alternatives to the post office for cash withdrawals. &
Moreover these figures do not include the additional costs POCL would incur in providing
these services. : fa
3.3.14 In short it looks perfectly possible in technical terms for POCL within a few years to offer
a range of banking services with suitable technology, and therefore to offer cash
withdrawals to claimants receiving benefits through ACT if they have an account with one
of a range of partner banks. But there must remain a question mark over the commercial
potential for POCL in the longer term.
FY
wae
eh
3.4 Role of PO counters in providing wider government services
3.4.1 POCL already provides a range of government services including National Savings,
vehicle licensing, TV licensing, passport applications and information about benefits. The
Horizon project will make most of these more efficient and provide clients with better
information. This will help POCL to retain existing clients. 5
yey
jeer
3.4.2 POCL is also exploring the scope for generating new income in the medium term by
becoming the ‘front end’ for:
Lea htt
- information about government services such as benefit entitlement, tax or training
provision;
- registration and notification such as notifying a death to different agencies, or
A
tegistering a new small business; E
- interactive-services such as searching for jobs or training places. =
3.4.3. This would build on POCL’s existing relationship with customers and trusted brand
* image. As well as existing paper based routes (such as vehicle licensing) these services £
could be provided using: : ES
- the Horizon platform: Horizon allows a range of transactions (such as National
Savings) to be done more efficiently, and counter staff to be prompted to ask
security questions. POCL’s preferred route would be to build on the planned
system using smartcard technology to provide stored value and customer
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3.4.5 Our view is that there is certainly scope for improving efficiency of existing services, but
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information, and a digital signature for security purposes. The Horizon system can
support smart cards and in this sense is “future-proof” However real time on-line
applications for immediate authorisation would require major changes to the
system. ,
- alternative (or additional) platforms: for example POCL could provide
information kiosks at branches and act as a “call centre”.
3.4.4 POCL believe there are significant efficiency gains to be had by combining information
services under a “one stop shop”. POCL’s advisers estimate that efficiency savings of
around £1,000 million could be achieved across government, and that POCL might secure
£160-£280 million of these savings,
there must be considerable uncertainty about both the timing and the role of post offices
in future provision of government services and therefore the potential for generating
revenue from this source.
Summary
3.4.6 In summary:
- the provision of basic banking services in partnership with the “Banks could
provide a plausible alternative income stream for POCL to compensate in part for
the loss of BA revenue from the switch to ACT;
- POCL may also be able to generate some income through the provision of “front-
end” central and local government information - though this is much more
uncertain;
- these alternative income streams are unlikely, even on optimistic assumptions, to
be sufficient to replace existing benefit income and associated footfall - therefore
(assuming a transfer to ACT at some stage) there will have to be some
restructuring of the PO network over time and/or explicit subsidy.
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4. Options for the future
4.0.1 This section of the report looks in detail at the options now available. We have considered
+ - three families of options:
- continuing with the project;
- Testructuring the project without the benefit payment card;
- cancelling the whole project.
Fr
g
Fa
g
4.0.2 All options are based on an understanding that Ministers want to find a solution which:
BER
- gives DSS/BA a more secure and cost effective system of benefit payment, and
. allows claimants to continue to collect cash from post offices if they wish;
- gives POCL an automated infrastructure which will help it to deliver banking and
financial services, as part of a long term strategy to preserve a viable network.
4.0.3 In each case we identify a lead variant which looks the most practical and goes furthest: .
ie] towards meeting the objectives of the different parties involved. Annex G models the
“ impact of each option and sets out key assumptions. In choosing between them the
I fp following issues need to be considered:
I" - the feasibility of the option; what risks are there around its delivery?
I Ps = the Government’s objectives for welfare reform and in particular the need for BA
to implement modem methods of benefit payment;
- the impact on the post office network;
- the overall impact on public spending;
- the implications for ICL; and
- the impact on Government objectives more widely including the wish to move to
universal banking.
4.1 Summary of the options
8B
4.1.1 Option 1 involves continuing with the contract with some limited extension of its
duration:
f
the project continues, including the benefit payment card, with roll out projected
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to start in January 2000. -_
- this would require implementation of the Panel’s recommendations, a renewed “
commitment by the parties and agreement with ICL on funding. We do not favour s
any increase in charges, but some extension of the contracts to provide for 5 years &
of steady state operation after full implementation of the system should be
considered. (Even this will probably leave ICL with a loss on the project overall.)
- for this analysis we assume contracts are extended to allow a three year transition
from the BPC to ACT starting early in 2005; DSS’s preferred variant is to start in
2003. In any event there must be a firm date for ending the contract, and DSS
would want to present it as part of a phased transition to ACT;
neted
ist
- the BPC would be introduced as the system is rolled out, steadily replacing paper
based payment methods;
- POCL would agree with ICL on building banking services into Horizon and seék
partnerships with the banks with a view to at least some partners being in place by
October 2001 and full facilities two years later. .
4.1.2 Option 2 involves restructuring the project without the BPC to allow an earlier move to
. ACT and parallel provision of banking services in post offices:
- BA withdraws from all contracts with ICL for development of the benefit payment
card on grounds of failure to perform.
- POCL works with ICL to implement the Horizon technology which is rolled out
between January 2000 and September 2001; and builds on it the capacity to offer
banking services with at least some partner banks by October 2001;
- BA draws up plans to migrate to ACT over three years from October 2001. In the =
meantime paper based methods of payment continue and BA strengthens anti-
fraud mechanisms;
- BA negotiates a new contract with POCL which leaves current arrangements in
place until the migration to ACT is complete;
5.
L
- the Government continues to fund POCL for the equivalent to the ‘floor’ level in
the current contracts with BA (£370 million, declining over time) at least until
2005/6.
Freee
Lerscsc)
4.1.3 Option 3 involves cancelling the whole project on the basis of ICL’s breach of contract
for failure to meet agreed timetable:
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- POCL seeks to put in place a separate integrated technology platform to enable it
to offer banking and other services as soon as possible. We assume some basic
technology could be put in place by October 2001 (perhaps based on simple swipe
card terminals) with more comprehensive facilities to provide full banking services
by 2003.
- BA draws up plans to migrate to ACT over three years from October 2001. In the
meantime paper based methods of payment continue and BA strengthens anti-
fraud mechanisms, perhaps building on the current electronic stop notice system
(ESNS).
4.1.4 Ineach option we think it will be necessary to take a long hard look at the viability of the
PO counters network in the medium term and draw up a proper corporate strategy aimed
at cutting the costs of the network while maintaining and where possible improving
Services, and developing new business.
4.2 Feasibility of the options - what are the risks?
4.2.1 The feasibility of continuing with the project has been examined in detail by the Panel,
and they conclude that it is technically viable and can support banking technology. The
main risks around Option 1 are:
- whether the problems which have dogged the project so far can be resolved.
Success of the project on a reasonable timetable depends crucially on the Expert
Panel’s recommendations being implemented, on ICL putting in enough resources
and on the renewed commitment of the parties to successful delivery. A lot will
teston the capacity of POCL to manage the implementation phase. We believe this
will need new management with business expertise at the top. DSS/BA are very
reluctant to remain exposed to these risks;
- whether satisfactory commercial terms can be agreed with ICL. Our legal
advice, summarised in Annex F, suggests that we are tightly constrained in what
could be offered to ICL (and for policy reasons we would want to offer as little as
possible). It is therefore very likely that ICL will make a loss on the project overall
if it continues. As explained below they are not in a strong position to absorb
losses. So there is a chance they will withdraw and litigate to recover what costs
they can. However we think this is unlikely: continuation offers ICL the prospect
of generating further revenues from the exploitation with POCL of the commercial
potential of the system; and from sales of the system overseas. Litigation may well
not succeed and would damage their reputation.
4.2.2 The feasibility of Option 2 raises different issues. Technically it should be much easier
to implement the Horizon system without the BPC, and this should free resources to focus
on developing a banking capability (though, paradoxically, removal of this embedded
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feature could now add time and cost). POCL might also be able to cut the cost of the
project by not installing kit in all offices (current plans include automating the 2,000 or z
” so part time offices, some of which open for only a few hours a week). However there id
must be significant risk around: >
- whether the project remains a commercially viable proposition for ICL and
POCL without the BPC. Withdrawal of BA from the project would immediately
remove the major source of revenue from the project, and POCL would be rolling
out kit which had only restricted use and limited revenue generating possibilities
until banking services were operational. Post offices would have fewer customers.
So even with the floor payment from BA it is not clear POCL could afford the
payments to ICL without further subsidy.
“a
yee
- how ICL would respond. This would depend on the outcome on the first point.
They may believe they can recover more of their costs by suing for wrongful
termination. However option 2 could only proceed on the basis of a negotiated
settlement with ICL Pathway. If such a settlement could not be reached then
option 3 would follow. :
x
r
- whether POCL can get agreement with banks in time to meet BA’s schedule
for moving to ACT and whether BA can complete the transition on schedule.
4.2.3 With Option 3 the key uncertainties are:
- how long it would take for POCL to put in place an alternative banking
platform, if it starts from scratch and conducts a new competition? There should
be little difficulty in installing basic swipe terminals by 2001; but the 2003 r
projection for a full integrated platform may be optimistic. =
- how ICL will respond. Full cancellation would make it more likely that ICL
would litigate to seek to recover its costs. Protracted litigation could make it =
difficult to implement a new integrated automation solution for the POCL, and this
could damage POCL’s long term businéss prospects. But using simple on line
swipe terminals as an interim solution would allow DSS to offer benefit recipients
migrating to ACT the facility of cash withdrawals from a range of bank accounts
across PO counters.
z
&
Fon
4.2.4 A major area of uncertainty which applies to all the options is whether, in the medium
term, POCL can generate sufficient revenue from banking and other services to
maintain the network in a stable state. The ‘medium term’ comes earlier under options
2and 3. The impact on the Post Office is discussed in more detail below.
prem
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43 Implications for Benefits Agency/DSS
Cay
4.3.1 DSS have always envisaged that when the contracts with ICL came to an end they would
move to pay benefits direct into bank accounts. The original timetable would have seen
the BPC introduced at the end of this year and run as the established method of payment
for 7 years before new arrangements were fully implemented. However delays in the ©
eae
Ps project now cast doubt on whether it makes sense to progress through the BPC to ACT
& rather than moving direct. 7
g 4.3.2 Option 1 gives the DSS a payment mechanism which is more fraud free and auditable
=
than current methods by the end of 2001, with cash available to claimants over PO.
counters. By giving PO more time to get banking services in place it helps to ensure a
smooth transition to ACT. However:
ra it also means postponing. by up to 5 years the substantial efficiency savings
available from ACT. DSS are concemed that this option would therefore not
represent value for money for BA and hence be contrary to the obligations of their
3 accounting officer to seek maximum value for money from public funds. A
g- Ministerial direction may be needed;
§ - it involves benefit recipients in two major changes in the space of a few years. The
ot BPC would be phased in over 20 months from the beginning of 2000, involving
i change for 19 million claimants, and major logistical exercise by BA. Five years
later DSS would begin the transition to ACT with the card completely phased out
by 2008. This will complicate the presentation and the administration;
3 - it leaves DSS exposed to the financial consequences of further delay, and
prolonged lock-in what they perceive as a hostile monopoly supplier.
Ba 4.3.3 Option 2 has a number of clear advantages for DSS and their customers:
- it allows DSS to take forward more ‘quickly its proposals for modemising the
= benefit system through ACT and payment over post office counters, bringing
forward the potential savings and thus satisfying value for money requirements;
Pa - it involves claimants in only one change rather than two;
provided the Post Office and ICL are able to deliver, it allows claimants continued
access to cash through post offices, while giving them the wider choice of banks,
ATMs etc. Overall, it looks less risky in technological terms
Nous
1
t
- it supports a move towards universal banking and combats social exclusion.
ees
4.3.4 Moreover payment book (though not Girocheque) encashment fraud can be tackled
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effectively by continuing the Order Book Control Service (OBCS) which is currently .
planned as part of Horizon. g
4.3.5 The implications for BA under option 3 are essentially similar to those under option 2. ¥
4.4 Implications for Post Office Counters ey
4.4.1 Option 1 automates post office counters with the technology POCL say they want and
need in order to offer the best prospects of becoming a viable long term business. It
«provides a secure income stream, and a flow of largely captive customers, for the life of
the contracts. POCL argue that transition to ACT via the benefit card would help them
ultimately to retain a much larger number of customers than a direct move to ACT from
paper systems. Spending by these customers provides income to both the Post Office and
private sides of the business, and is important to the viability of the network
Pets
4.4.2 POCL estimate that under this option there would be an average of 200 post office
closures a year, roughly in line with current trends, up to the end of the contracts; and that
POCL would remain broadly at its current marginally profitable position (£30 million pa
on £1.2 billion tumover) until then before taking account of any income from banking
technology.
E
* pene
4.4.3 Option 2 would give POCL the same automation platform (if a viable deal could be done
with ICL). This would help it to secure income from other clients such as National
Savings and the utilities, and to compete for business from benefit recipients migrating to
ACT. However, whereas option 1 allows POCL to build new services on the base of an
effectively captive market of around 19 million claimants, under this option POCL starts
to lose customers as they switch to ACT. This faces POCL with two major challenges:
a
- it requires POCL to develop with ICL the appropriate banking technology as part
of the Horizon platform, and establish partnerships with the banks;
re
mea
- income from BA, its major client will effectively disappear beyond 2005.It is very
unlikely that POCL would be able to replace the loss of BA revenue by revenue
from banking and other new business within that timescale.
gene
44.4 There would therefore be a need for a transitional period, possibly involving payment of
+ adirect Government subsidy to fund the network until it could be made self-financing
and/or slimming down the network, reducing the number of urban offices whilst keeping
the rural network intact as far as possible.
port
poured
4.4.5 Any significant loss of cash outflows through post offices resulting from an early switch
to ACT under options 2 and 3 could undermine the viability of Girobank’s corporate
deposit business which is extensively used by small firms.
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a.
3
4.4.6 Cancellation of the project under option 3 would be a serious blow to POCL:
- it would put off full counters automation with the functionality desired by POCL
for some years (but gives it time to reassess what it really needs);
i}
z - commercial prospects would be damaged - many of its current clients are already
§ very keen to have Horizon implemented and may not be prepared to tolerate the
further delay and uncertainty associated with developing a new system and
potential new clients may be lost; :
- as BA moved to full ACT, payments to POCL would taper down from around
£400 million in 2001 to close to zero by 2005, representing loss of nearly 40 per
cent of current tumover.
2B 44.7 POCL have provided estimates of the impact of the loss of 100% of this income on the
* post office network:
By - 5,000 to 13,000 post offices could close (depending on whether POCL managed
Crown offices were closed, or more rural and urban offices were allowed to close); ~
- an annual subsidy of up to £300 million would be required to attempt to stabilise
the network at this level;
- there would be job losses of up to 43,000;
- compensation to sub-postmasters and redundancy payments to Crown office staff
could amount to £350 - 500 million.
arid
4.4.8 However, as explained in Annex C, the mechanism by which a loss of business impacts
on the network is not straightforward. We have not been able to satisfy ourselves on the
basis of the information provided by POCL that these estimates are robust.
4.4.9 POCL would need to respond to this by spending perhaps 6 months developing a serious
z business strategy. The impact of losing BA income could be mitigated by winning new
3 banking business, but POCL could not realistically be ready by 2004 to replace £400
million of revenue from BA with other income streams. So in order to keep the current
‘Z network of post offices, a transitional period would be needed which would involve the
* payment of a large subsidy to POCL.
a 4.4.10 If POCL is to be a viable long term business, developing the banking area is essential but
BS not sufficient. In any case there is likely to be a need for managed reductions in the
. network over a period of time, focussing on thinning out the urban network and largely
& preserving the rural network, but perhaps with more use of mobile post offices, local
Ey
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agents and kiosks. However, this process will be hard to manage; the network could
become unstable resulting in large compensation to sub-postmasters whose businesses had
become unviable. Continuing the project gives POCL the best chance of a smooth
adjustment path.
-=
4.5 Financial implications
4.5.1 The financial implications of each option are analysed in detail in Annex G. The impact
on the public sector has to be seen in the round with losses to the Post Office balanced
against savings for DSS. The net impact can be summarised as follows (net present value
of the options discounted at 6% to 2009/10)
£ billion Option 1 Option 2 Option 3
DSS admin savings I 0.4 1.0 13
DSS fraud savings I 0.9 0.8 0.8
‘I NetimpactonDSS I 1.2 19 2.1
Net impact on 0.2 -0.6 1.2
POCL
overall NPV saving I 1.4 1.3 1.0
exit payment toICL I 0 -0.2 to +0.3 -0.2 to +0.3
4.5.2
45.3
These results should be treated with caution. The estimates of the impact on DSS are much
more robust than the estimates of the impact on POCL. We have identified, but not
included in the totals, a possible ‘exit payment’ to ICL which may result either from
negotiation or litigation; but this is highly uncertain, and does not imply acceptance of any
liability. With these caveats, the results suggest:
- the most cost-effective options from DSS/BA point of view are either option 2 or
3;
- however when the impact on POCL is taken into account option 1 and 2 look more
attractive;
- but the margins of error in this exercise would suggest that caution should be
exercised before ranking options. .
Under each option there are questions about DSS funding which would have to be
addressed bilaterally with the Treasury.
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4.6 Implications for ICL
4.6.1 We have considered what the impact each option would have on ICL and its parent,
Fujitsu. ICL Pathway has been set up as a subsidiary of ICL which has provided BA and
POCL with parent company guarantees on finance and performance.
4.6.2 The ICL Group balance sheet is not strong. In 1997 it included net assets of around £260
million. We believe around £125 million of this represents capitalisation of the work on
this project, some fixed assets but mainly work in progress. This is likely to be greater
now, perhaps of the order of £160-170 million. Liquidity is worsening, down from £105
million of net current assets in 1996 to £42 million in 1997.. There are no obvious areas
a)
F
a where provision for losses on these contracts have been made. There is a possibility that
ICL could strengthen its balance sheet by writing back some of £200 million goodwill
iS] written off according to existing accounting regulations that have subsequently been
be revised, but this is not mandatory.
3 4.6.3 Profitability is also weak. Ona like for like basis ICL made an operating loss of £7 million
8 in 1996, and a profit of £32 million in 1997, on a tumover of £2,477 million in 1997. So
the group is operating at pretty close to a break even position.
4.6.4 Under option 3, cancellation of the whole project, Pathway say they could suffer a loss
of around £250 million. Assuming ICL stand behind Pathway, they will have to bear most
A of this. The implications for ICL of cancellation, other things being equal, are:
x - it would have to write off a good part of the £125 million or more of capitalised
a assets from the project unless, say, the work in progress could be deployed on
another similar project;
4 - it would bear a loss at Pathway that could amount to £250 million;
z - thus reducing net assets by, conservatively, around £350 million; and creating a
Bs situation of net liabilities of up to £100 million before any write back of goodwill;
3 - it would make a total loss in 1998 of around £350 million;
- and would seemingly put at risk for many years any chance of a successful
flotation (planned for 2000).
4.6.5 In these circumstance it would be possible in principle for ICL to simply wind Pathway
Pe up, leaving Pathway’s creditors, rather than ICL, to foot the bill. However this is unlikely.
7 ICL are more likely to seek guarantees, or a significant injection of new capital, from
3 Fujitsu.
a
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es
4.6.6 In either case ICL’s reputation with Government (one of its main clients) will suffer a :
severe setback. But if ICL sued HMG first and secured a reasonable outcome it might be
able to salvage some of its commercial reputation by ensuring blame is seen to lie with the
Government parties and the PFI concept, portrayed as unworkable for large IT projects.
4.6.7 Cancellation would have limited financial implications for Fujitsu, since ICL represents
only around 5 per cent of group shareholders’ funds and 2 per cent of net current assets.”
However Fujitsu has underwritten a £200 million loan facility to ICL Pathway, and fujitsu
itself appears to have had a bad year in 1997-98, with group profit after interest and taxes
slumping from £254 million in 1996-97 to just £26 million in 1997-98. This seems to be
due to the economic problems in Japan and south east Asia. So a problem at ICL is one
of many, which may ease any write off necessary from taking action at ICL, or may be
the straw that pushes Fujitsu into loss. Whilst Fujitsu’s survival is not in any way
questioned, there could still be pressure to minimise losses where possible, although ICL,
it would appear, would be one of several target areas.
4
s
4.6.8 The implications of the loss of the project for employment within ICL depend on whether =
Fujitsu decides to divest itself of ICL subsequent to its inevitable poor profit performance. c
It is estimated that some 270 people at ICL Pathway are working on this project and many ik
more at their contractors. However any IT staff released are likely to be quickly re- ~
employed by competitors given skill shortages in the IT industry. ~
4.6.9 Cancellation of the project could affect perceptions of the UK Government as a partner
and hence future inward investment from Japan where Fujitsu are influential. (Japan
accounted for some 9.4 per cent of inward investment into the UK in 1996). There could
well be an impact on Fujitsu’s future strategy for the UK; they are currently planning an
£800 million expansion to their semi-conductor plant in the North East. It is however
difficult to forecast the precise impact.
A
4.6.10 Under option 2, cancelling the benefit payment card would damage ICL’s reputation but
installing the Horizon system in Post Offices would allow it to salvage something. But to
remunerate the investment it is making it will need to generate income of £100-200
maa
million a year for at least 5 years. POCL could not afford that without subsidy. G
4.6.11 Under options 2 and 3 there would be a loss of business for suppliers to ICL supporting 5
the BPC. These include Girobank who are contracted to provide helpdesk facilities which &
will employ around 400 staff.
4.6.12 Under option 1 and option 2 it is clear that on current plans ICL Pathway will make a a
large loss. From ICL’s point of view it will want to weigh up, among other factors:
pret
- estimates of income from continuing with the project, including possible contract
extensions and a run-down period and installing banking technology; and
mt
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the probability the project can be completed successfully with no further delays;
'
against:
- the likely outcome of legal action.
5
Fe 4.6.13 It is not clear where the balance lies from ICL’s point of view. 1»
I
2° 4.7 Presentation and handling
gq 4.7.1 Annex E sets out recent Ministerial statements on these issues.
4.7.2 Areas of presentational difficulty with option 1 will be around what is said about the end
of the contract period and the future of the counters network. It should be possible to put
out a positive message on the banking services that POCL would be developing. We
would also have to explain how the introduction of the BPC fitted with the Government’s
long term plans for ACT.
4.7.3 With options 2 and 3 an immediate difficulty would be explaining to the sub-postmasters
and others why the Government had reversed its stance on the BPC and to the public in
general what this meant for the future of the network in particularly rural areas. Claimants
may well be concemed if plans for an early move to ACT could not be backed by an
assurance that they would continue to be able to get their cash from post offices. On the
other hand it would be possible to explain how ACT was a more efficient system than the
BPC and would allow DSS and POCL to move forward in partnership.
By
ne
4.7.4 Potential difficulties would seem to be:
- Government might be accused of wasting money on the project (if legal action or
negotiation leads to large compensation payments to ICL);
wtdtad
- continuing with paper-based systems when a more secure catd-based system is
almost ready;
Setaid
- public promises given to sub-postmasters and others that DSS was fully committed
to the objectives of the project;
- criticism of Government from ICL, with potential knock-on effect on reputation
of PFI projects.
y
Fi
4
- options 2 and 3 depend on POCL’s having banking capacity for ACT by 2003-04;
3 the working group believes this can be achieved, but it is challenging for POCL;
§
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Aver,
it may not prove possible to negotiate an acceptable deal with ICL to take forward
only the Horizon part of the project; ICL might decide the project is not viable in
the proposed form and therefore seek redress through the courts.
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5. ‘Annexes
Annex A Benefit payment
A.l DSS pays over £77 billion a year to 27 million benefit customers in - around one billion
transactions a year. There are three methods of payment:
Method of payment % of % of cost per
claimants transactions I transaction
order books across post office counters I 67 80 47 pence
on presentation of giro cheque at post I 5 7 78 pence
office .
via ACT to claimant bank account 28 . 13 1.4 pence
Cost to BA of administering the current system is about £525 million per year, of
which some £400 million is the payment to POCL;
fraud arising from current means of payment is estimated to be around £110
million a year.
A2__ Features of existing methods of payment are:
Order Books are a paper based method of payment which used since 1948. They
are well liked by customers and have proved a reasonable reliable delivery system,
giving customers a sense of security, but they are expensive to administer; and
require recall and re-issue if claimant circumstances change - resulting in delays
and sometimes hardship for customers. They are also subject to a high level of
fraud due to accounting and reconciliation problems - it is not possible to reconcile
encashment to an issue. About £85 million a year is lost through fraudulent
encashment - of the total number of order books reported lost or stolen 63% are
subsequently found to have one or more foils cashed.
Girocheques are the second paper based method of payment and are the most
expensive to administer. They are also subject to high levels of fraud due to
reconciliation problems. About £22 million a year is lost through fraudulent
encashment. Of the total number reported lost or stolen 61% are subsequently
found to have been cashed.
Automated Credit Transfer is a modern method of payment which is cheap to
administer. Payments are only issued shortly before they are due, so a change of
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circumstances does not normally require any recovery or recall - resulting in less
inconvenience or hardship for benefit claimants. There is currently no evidence of
ACT payment fraud. Payments are accounted for accurately and reconciliation is
fully automated.
A3 ACT isan option open to all claimants with bank accounts. The percentage who choose
to be paid by ACT has risen steadily in recent years:
Year 1993 1994 1995 1996 1997 °
% paidby ACT 16.2 22.7 22.2 25.7 28.2
- 47% of new pensioners choose payment by ACT (May 1998). -
- 53% of new child benefit customers choose payment by ACT (May 1998).
US and Australian experiences of ACT , iL
A4 Payment of benefits directly into bank accounts has been introduced recently in Australia
and is to be introduced in 1999 in the USA. Some lessons to be learnt from these
experiences are:
- there have to be exemptions for some claimants. Neither Australia nor the USA *
has found a way so far to pay benefits by ACT to everybody;
1m
- payment by ACT is far cheaper than paper-based methods such as sending a
cheque through the post;
- the post offices in Australia and the USA have a much more limited role in benefit
payment compared to the UK - only delivering cheques through the post rather zg
than cash over counters;
twe
- there seems to have been little difficulty making the changeover in Australia - this
is probably because most recipients already had a bank account into which they
paid their benefit cheques.
eA
rene
USA
AS - Benefits are currently paid by sending cheques through the post. These then have
to be paid into a bank account or cashed, with the cost incurred by the recipient.
pene erty
- Congress passed a law in 1996 which required all payments by the federal
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nitude
1
government after 1 January 1999 to be made by electronic funds transfer (ie ACT).
This includes benefit payments; .
ose
- recipients of payments are required to designate a financial institution or agent to
which payment should be made (some of which will charge the beneficiary a fee);
ese
- the Treasury can grant exemptions for classes of recipients in cases of hardship or
other circumstances;
- details of how this will operate are being worked out by the Treasury.
eal
Australia
Z A6 - A decision was made pre 1990 that all benefits would be paid by ACT and
. customers would not have a choice. Before the change payments were made by
cheques sent in the post;
tes
- now over 96% of social security payments are made fortnightly by ACT to banks
and other institutions using a system similar to that used in the UK;
Sit v2
- conversion to ACT was not seen as a major problem for customers because a very
3 high number held bank accounts and Australia Post was not a key player in the
FS cheque cashing market, largely because most customers already paid their social
security cheques into their bank accounts;
> - it proved necessary in certain circumstances to allow exemptions which are,
however, limited and difficult to obtain. Those customers not regularly paid by
ACT are still paid by cheque. Payments by cheque are strongly resisted because :
of the administration costs, including expenses aligned to fraudulent negotiation;
- to make emergency payments Australia successfully trialed a plastic card system
which utilises a““DSS Bank”. This holds temporary accounts accessible via the
o ATM network - called electronic benefits transfer. It has now been recommended
. for national rollout.
xR
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Annex B_ Post Office Counters Network
B.1 Post Office Counters Limited (POCL) provides services through a network of around
19,000 outlets (10,000 in urban areas, 9,000 in rural areas), covering the whole of the UK.
‘ood
B.2 The network provides local communities with a wide range of services ~ access to postal
services, benefit payments, banking and bill payment services, licensing and other
Government services and a range of other customer driven services (lottery, bureau de
change, insurance).
Saat
kbd
B.3 Local businesses make full use of these services with particular emphasis on corporate
banking, cash provisioning and access to mail services.
eokhad
B.4 These services are universally available through the network, with 96.8% of the UK
population living within a mile of a post office. The services have a particular importance
in rural areas where there may be less alternative provision (for example as the banks
a rationalise their branch networks). a eee
serve local communities of less than 3,000 people.
ede
B5 _ Itis estimated that 28 million people per week visit their post office.
Types of post offices
if B.6 600 post offices (Crown Post Offices) are operated directly by POCL. The remaining
ba 18,400 are operated on a variety of agency arrangements whereby POCL contracts with
individuals (in a few cases with companies) to provide services on its behalf. Post Office
services are provided in such cases using the agents’ premises and staff - typically in an
operation which also contains a private retail business. This allows cost-effective operation
of the post office through shared overheads, Conversely in rural areas, many village shops
are only able to survive in the face of retail pressures because of the income operating a
post office provides.
B.7 _ POCL pays the agent for work done on its behalf. Payments are generally split into two
areas - a fixed payment which is not dependent on amount of work done, and a variable
payment directly related to work performed. The fixed payment is an important part of
the payment made to smaller offices, the variable payment is more significant for larger
offices.
B8 POCL employs 12,000 staff directly, and the 18,400 agents themselves employ around
40,000 staff. Overall therefore about 70,000 people derive their income from Post Office
Counters activities.
ate
Sources of revenue
3
$
B.9 POCL mainly offers agency services on behalf of various organisations in the public and
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Bes
private sectors, including central government departments and agencies, local government,
utility companies and banks, as well as providing the high street outlet for the Post
Office’s Royal Mail and Parcelforce businesses.
rh
=
B.10 The following chart shows the Post Office’s sources of income in 1997/8:
Source of Income 199798 2
2h
B.11 This shows that the Benefits Agency (including the Northem Ireland Social Security 9
Agency) accounts for over a third of POCL’s income. This business is also important ¢
because of the volume of customer visits that it brings and the opportunity to offer to these
customers other services available from POCL. It also provides opportunities to sell them
goods from the co-located private retail businesses. In this context, the benefits business
I Foyal Mail
is particularly significant in that it puts cash into the hands of the customers visiting the g i
post office.
POCL Income £ million %
Benefits Agency 420 6 E
Royal Mail 251 21 .
Bill Payment Services 180 15 f
DVLA 56 5 ~
‘National Savings 4a 4 i
Other 209 9
Total 1168 100 é
&
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Annex C The Cost Structure of Post Office Counters
C.1 This annex discusses the cost structure of PO Counters and explains why losses of income
can have a significant impact on profits and the size of the network. The remuneration of
post office agents is an important factor in determining the impact of income losses on the
network.
Network costs
C.2 A significant proportion of PO Counters’ costs are the costs of the network: the Crown
Offices and the agencies account for 64% of network costs.
PO Counters Costs 1997/8
Central Services.
finance and other 3%
12%
sales and
marketing
4%
regional support
3%
crown offices
19%
distribution and
warehousing
11%
agency offices
Agency income and costs
C3
Sub-postmasters and other agents are not employees of POCL and are consequently
responsible for providing their own premises and their own staff to run a post office.
POCL will pay them for Post Office work done, but most sub-postmasters will gain an
additional income stream by running a private business (newsagent, general store etc) from
the same premises as his/her post office. This private business can utilise the customer
footfall attracted by the Post Office to create further income for the agent, as well as
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enabling the spreading of the costs of running the post office out of the same premises,
It is generally this combination of Post Office and private business which creates the
income levels which, when set against the shared cost base of operating out of common
premises, allow a commercially viable small business to be conducted.
POCL pays its agents for providing services on its behalf. Agents are remunerated through
a system based around a fixed element (paid irrespective of the volume of work done in
the office) and a variable element (based on the specific volumes of work done at the
office and accordingly increasing, or decreasing with volumes handled). The calculation
of the fixed payment for any particular office is determined for most offices through a
formula agreed with the National Federation of Sub Postmasters which takes into account
historic volume and payment levels at the office.
This is determined by the specific contract type the office works under and the volume of
work handled. The very largest offices have pay which is entirely variable, whereas the
very smallest have pay which is almost entirely fixed. For the largest 20% of offices the
fixed element of pay represents between 20% and 35% of total pay, whereas for the
smallest 20% the fixed element represents between 85% and 95% of total pay.
Fixed Payment as % of Total Pay
9% Fixed
% of fixed pay
fee &
5
deciles from largest
e268 8
smailest offices
The rationale is straightforward. Smaller offices, often in rural areas, can attract only few
customers. If these offices were paid purely on volumes of transactions the income to the
sub-postmaster would be insufficient to cover the costs of providing and operating the
outlet. Alternatively, larger post offices conduct large volumes of work and therefore
variable payments do create the basis for a sustainable business.
The following chart shows the percentage of transactions which are benefit payments by
size of office. Although the relationship is not wholly straightforward, it shows that the
benefits business is “over-represented” in the smallest offices - i.e. those with the greatest
41
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proportion of fixed payments in total payments.
Benefits as % of Total Transactions
18%
A large proportion of PO Counters costs are fixed: they do not vary with the volume of
business or with the number of outlets. This is for two main reasons:
~ the payments to agents: for a large number of sub-post offices POCL’s payments
for business carried out is fixed (see above);
- PO Counters is a network industry. A significant proportion of its support costs -
for example the costs of distributing cash and stock to the national network ~ are
only partially variable with the number of outlets and the volume of business.
The following chart shows in broad terms the breakdown of variable and semi-variable
costs by volume; costs which are variable and semi-variable by outlet; and costs which are
fixed with outlets and volume. These are broadly as follows:
variable costs by volume - variable payments to agents; direct support costs
semi-variable costs by volume - variable costs at Crown Offices
variable by outlet - Crown Office costs; fixed payments to agents
semi-variable by outlet - distribution; warehousing; regional support
fixed - central costs of running POCL as going concern
ee eve
Only about 30% of PO Counters costs are fully variable with transactions, though the
degree to which these costs remain fixed or only partially variable over time will vary.
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Variable, Semi-Variable and Fixed Costs
Fixed ‘,
49% Variable by
volume
32%
Semi-variable by
outlet
14%
Semi-veriable by
Variable by outlet volume
22% 13%
Impact of income losses on costs and the network
€.10 As income from BA falls then:
ICL loses income from BA in its Crown offices and associated footfall. However
it is able to recover some costs from the reduction in volume-related payments to
its agents for BA and other transactions and other variable overheads. But these
variable costs are only around 30% of total costs - and the benefits business is a
greater proportion on business in smaller offices, which are more dependent on
fixed payments than variable payments (see chart above). Given the small margin
that POCL earns on turnover (£35 million profit on a turnover of £1.2 billion)
POCL moves into loss. A £50 million loss of income would reduce POCL’s profit
to zero.
sub-postmasters lose income via the reduction in variable payments from POCL for
transactions carried out - due to both loss of BA business and the impact of loss of
footfall on other PO transactions. This will particularly affect the larger urban,
suburban and rural offices which handle a high proportion of BA transactions, for
which a large proportion of their income from POCL is volume dependent, and for
which PO business is a large proportion of their overall business (including retail).
POCL believe there are around 4,000 urban offices and 500 rural offices which fall
into this category (POCL assume that these offices will close under any scenario
of loss of income from BA). Furthermore the income sub-postmasters gain from
private retail activity will fall as footfall reduces. For many offices the business will
43
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no longer be viable. This will impact on the re-sale value of post offices.
ee dara,
Cl 1 Both of these impacts will lead to network closures arising both from management action
to reduce costs, and from sub-postmasters who no longer found the business viable:
GES
a in order to reduce its losses POCL will seek to reduce its network costs. This will
be via closure of post offices which represent a high fixed cost - i.e. the Crown
offices and the smaller rural offices - where most of the remuneration is fixed and
not volume dependent;
Al I EAD
=
the reduced viability of sub-offices (particularly the larger offices dependent on BA
transactions income) and the downturn in the resale market will lead to closures of
agents’ offices.
ae)
C.12 Network closures will mean that POCL will experience further reductions in income from
BA and other transactions that were formerly carried out at POs which have now closed.
RM
& The impact of this on profitability will depend on the management action taken by POCL
and the extent to which this business migrates to other offices.
a .
ie C.13_ POCL argue that even at this point the network may not be stable. Other clients may
os withdraw business as the network reduces, leading to further losses of income and pressure
Bh to reduce costs.
wl aq
~ C.14 The extent to which a downward spiral occurs rather than a managed transition to a
a reduced network depends on a number of factors:
ts
. the size of the loss of income. However the marginal nature of POCL’s business,
its high fixed costs and the importance of footfall income means that even a small
loss of income from BA can reduce profitability significantly.
an
= Ls migration of business from closed offices to other offices. The greater control that
+ POCL can have over the offices which close, the more they can ensure. that
<b . Tationalisation occurs in locations where offices are closely located to one another
= so there is a greater chance of capturing migrated business.
. the speed of change relative to the natural rate of tumover of post offices. Post
offices change hands at a rate of 10% per annum, although this rate is dependent
on general economic trends and varies significantly between outlets. The PO can
= use this tumover to manage change by seeking to reduce costs by alternative means
By to closing offices (or allowing them to “self-close”‘as they become unviable)’
through reducing the size and scope of offices, relocations, reducing the number of
counter positions etc.
C.15 The PO argue that the more time they have to manage change the better they can work with
these factors to reduce network costs and avoid disruption. Furthermore reductions in other
& fixed costs become possible with more time - for example the radical rationalisation of PO
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Counters cash warehousing (from 300 to 20 warehouses) took around eight years to
achieve. Other costs could be reduced in a shorter timescale - for example the re-
organisation of POCL’s field management structure took 18 months.
Agent compensation
C.16
Closure of agency offices is likely to lead to compensation to sub-postmasters. Under
existing arrangements sub-postmasters are compensated by an amount equivalent to 26
months remuneration if their post offices are compulsorily closed. This applies both if the
office is closed while the postmaster is in situ and when closure prevents a retiring
postmaster selling on the post office business to another party. There is no current scheme
for compensation for a loss in value of a post office. as a result of reduced tumover
although POCL would come under severe pressure to compensate sub-postmasters for loss
of business arising from a government decision to move to compulsory payment of benefit
by ACT. . .
Costs of maintaining the rural network
C17
The Working Group asked the PO to provide an estimate of the’cost of keeping the rural
network open in the face of significantly reduced benefit payment business. POCL argue
that it is impossible to segment out one part of the network in this way - even ifa robust
definition for a “rural” post office was available. As shown above, a significant proportion
(around 15%) of the costs of running the network are common costs which are only
partially variable with the number of outlets - for example the costs of distribution. The -
distribution system serves both rural and town areas and a loss of volumes would not
significantly reduce costs. At present these costs are spread across the whole network, but
if rural offices were kept open whilst urban offices closed these costs would fall on a
reduced number of offices. So although the costs of maintaining the rural’ network at
present (with the current network open) are relatively low, the costs of maintaining the
network once urban offices were closed would be much more significant. POCL estimate
+ the cost could range from £100 million to £300 million a year - although they believe in
C.18
C.19
practice it would not be possible to target the rural network in this way.
PO Counters have not provided an estimate of the subsidy that would be required to
prevent any closures of the network (although this was requested by the Working Group).
They argue that such a subsidy would not be desirable, since it would undermine the
commercial nature of the business.
In our view there is some scope for protecting the rural network by a phased thinning out
urban offices where there is some over-provision. But this would only contribute in a
limited way to meeting a revenue shortfall in the network as a whole.
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Annex D The project
In May 1996, BA and POCL signed PFI contracts with ICL Pathway for Pathway to set
up and maintain a secure, automated infrastructure for POCL which would.
~ allow benefit payments to claimant presenting a special magnetic stripe card, thus
- provide a more secure method of paying benefits; and
- provide an automated platform for other POCL business.
The basic idea of the project is, for benefit payment:
- claimants are given magnetic stripe card instead of order books and giros;
= networked computer terminals are installed at all 40,000 PO counter positions to
automate procedures to assist with delivery of products and administration;
- network is linked to BA computer system (CAPS - Customer Accounting and
Payment Strategy);
- claimants go to their nominated PO; counter staff swipe the card through terminal;
- the computer prompts staff to ask appropriate anti-fraud questions and tells them
how much benefit to pay, and;
- beneficiary collects ali money due (ie they cannot leave some of the money
uncollected), and there is full automated reconciliation of transactions back to BA.
For other POCL services, the system provides:
- networked terminals with the facility for handling automated payments;
point of sale information gathering and processing;
- up to date information for counter clerks on a wide range of transactions.
The programme comprises a number of interdependent systems and services, requiring
work to be completed by, and coordinated by Pathway, BA and POCL:
- the benefit encashment service relies on feeds from BA’s CAPS systems,
containing customers’ personal details, records of payments in and out and feeder
systems for each type of benefit.
- Pathway’s systems also rely on POCL providing Reference Data (details of post
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offices, products, prices, etc) and need to be integrated with POCL’s existing
automated systems and its accounting and management information systems.
any
D4 — Separate testing of systems, followed by integrated testing of ‘model offices’ and live trial,
lead to the full national rollout of the service to all post offices and BA district offices, &
subject to acceptance tests at appropriate stages. Benefits migrate to the new system =
according to a prepared schedule. :
Charges u
D.5 Pathway charges to BA and POCL are driven by volume, based on a matrix of unit
transaction prices which fall over time. Some payments are guaranteed in line with rollout
to post offices. BA have a separate contract with POCL for counter services, the payments =
including fixed, semi-fixed and variable elements, with a ‘floor’ providing that payments é
cannot fall by more than a specified amount in any one year, regardless of volumes.
D.6 The programme is a large and strategic investment for ICL and its parent, Fujitsu. It is also
a major business venture for the sponsors. It has been described as world-class in its scale;
but is now being overtaken by other developments particularly in developing banking
alongside postal services. ;
agra
D.7__ Pathway has taken on significant risk - including development, construction, operating,
commercial and funding risks. Pathway has also taken on a degree of risk associated with
encashment fraud (up to a ceiling of £200 million), although the ultimate risk of secure
service for the £100 billion or so of benefit payment remains with BA/DSS.
Thaels .
Rollout
D.8 - Fora customer to have their benefit paid by card requires
: their designated ‘home’ post office to have Horizon installed;
: the appropriate BA district office to be ready; and , a
: the BA systems which support the benefit(s) concemed to have been switched
across to the card. The timetables are interdependent and need to be planned e
accordingly. &. I
D.9 The ‘programme complete’ milestone is reached when rollout to post offices and BA local BE i
offices and the switch to payment by card of the main benefits are both completed. It could =
be decided not to switch one or more benefits to the card, but the contracts provide for 2
revenue guarantees to Pathway if transaction volumes on Horizon fall below certain levels. R
Short term anti-fraud measures
vars
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D.10 Asan anti-fraud measure within the M25, order books are bar coded and the Automation
of London post offices (ALPS) has provided a bar code reader and an Electronic Stop
Notice System (ESNS) running on a PC on the post office counter. Order books can thus
be checked against a file of ‘stop’ notices downloaded from BA’s Electronic Stop Notice
Control System (ESNCS) and be withdrawn if necessary. ESNS also captures and returns
to ESNCS some information about order book issuance and foil encashment.
D.11_ The Order Book Control Service (OBCS) extends this facility as part of Horizon:
Progress
D.12 The competition took place and the contracts were let on the basis of a detailed requirement
agreed by the sponsors which was ‘dropped down’ to detailed service descriptions in the
first few months of the contracts. The process revealed a complexity not previously
properly understood. Timetables slipped. A replan in February 1997 set out new milestones
formally negotiated under the terms of the contracts. Timetables slipped further and BA
and POCL have issued notification of breach of contract by ICLwith BA issuing a legal
‘cure’ notice in response to Pathway’s failure tomeet a contractual milestone in November ~
1997. Pathway has responded by blaming the public sector parties for the delays.
D.13 BA and POCL, through their legal advisers Bird and Bird, commissioned an independent
of the programme by consultants Project Mentors. They concluded:
- ‘...Pathway seriously under-estimated the effort and time needed to develop the
services...
- ‘Pathway have been responsible for the delays to the programme, since the re-plan
in February 1997, that caused the November 1997 breach by not allocating
sufficient resources to complete their contracted obligations within the agreed
timescale...’
- ‘A secondary, and ...relatively insignificant, cause of the breach is delays resulting
from slow resolution of issues...We do not believe Pathway allowed sufficient time
for this activity in their estimates...’ :
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Annex E Recent Ministerial statements
Manifesto commitments:
The manifesto said:
“ Public services and transport services in rural areas must not be allowed to deteriorate.
The Conservatives have tried to privatise the Post Office. We opposed that in favour of a
public Post Office providing a comprehensive service. Conservative plans would mean
higher charges for letters and put rural post offices under threat.”
Public statements on the Horizon project:
Kate Hoey MP in delivering a speech to the National Federation of Sub-postmasters on behalf of
Frank Field, Minister for Welfare Reform on 12 May 1998 said (extracts):
"We recognise that the Horizon project is as important to you as it is to the DSS... We now
have more than 25,000 Child Benefit customers using the Payment Card to collect their
money at the post office. And 12 million, or 50%, of all benefit customers currently using
post offices to get their money, will be ready to switch to the Payment Card by the time
Horizon begins its national roll-out. This is a remarkable achievement and reflects the
commitment of every one involved in the project to provide a secure, cost effective and
convenient method of payment for our customers.”
“The Payment Card will also help cut down on paper and bureaucracy. Our new payment
systems will consolidate customer details on a single database for all benefits, so in future
a customer will need only report change in personal details, for example, change of
address or post office, only once - the system will automatically update all benefit records.
The Payment Card will also give our customers a more convenient and safer method of
collecting their money, which is what they want. And it will also improve the way DSS
accounts for the massive expenditure on benefits passing through post offices, now
approaching £56 billion a year. The Payment Card is designed to do all these things."
“The project, we know is also crucial to the future of your business. You will understand
the importance of taking great care in planning the next stages of the project to ensure that
we get it right.”
“We are committed to providing a modern, secure payment system which is cost effective,
robust and fully accounted. Our partnership is crucial in making these objectives
achievable for benefit payments through post offices. With your 19,000 outlets you can
reach parts of the country other retailers can’t, or don’t want to reach. So we need you
as much as the communities you serve need you. But equally, only DSS can bring in 19
million customers who want to spend as well as collect their money."
“As we move towards the millennium there will be ever greater opportunities to harness
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new technology and to expand your business. But whatever the future may hold, you can
be assured that our longstanding association and commitment to providing an efficient and : §
secure benefit payment service for people who want to collect their money at their post a
office is as strong as ever.”
Statements in Hansard:
There have been various written statements made by Ministers in Hansard over the last year
. Tegarding the project. These have tended to focus on the expected completion of roll-out of the
system, and the trial already in place. Statements have also been made about fraud savings. In an
oral exchange in the House of Lords on 1 April, Lord Haskel said:
. “My Lords, this is certainly a system which is designed to combat fraud. Unlike order zy
. books and giro cheques, the payment card which will be part of the system has no intrinsic FS
value and so carries little personal information. The system will be more convenient. Any
changes to the benefit payment cards will be made automatically on the system.
This is a huge project, which is under constant discussion, and Ministers meet to consider
it from time to time. I am not in a position to say what the situation is regarding the R
budget.” s
ca
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Annex F Summary of legal advice
GERD
Under procurement law is it legal:
1: to extend the contracts?
The contract term is made up of an implementation period and a fixed 5 year “steady state”
period. The implementation period could be extended if objectively justified’ Given the
many delays to this project a 12 month extension looks perfectly possible. Significantly
extending the steady state period would be problematic because a 5 year term was specified
in the OJ notice for the original competition. An extension to the steady state period could
possibly be justified according to the Programme Lawyer if it could be demonstrated that
wae
Bs the additional period of operation was necessary due to “unforeseen circumstances” and
S could not be provided separately for “technical or economic reasons...without great
im inconvenience to the contracting authority”, or was “strictly necessary” to the performance
ja of the original contract.
“ 2 to institute a wind down period after the end of the contract?
a
The Programme Lawyer says not until nearer the time when it might become necessary
because of unforeseen circumstances (as above). Treasury Solicitor believes the risk of
successful challenge to a 12-18 month wind down period is small and hence this possibility
should not be ruled out.
3 to increase payments to ICL?
s , There is no problem about making additional payments to ICL for additional services
& : provided the additional services have been procured properly. The Programme Lawyer
considers such additional services can be acquired using the formula set out in paragraph
1 above. Treasury Solicitor has some reservations about the scope of the additional services
which can be added - more of the same in the wind down period provided they are of
limited duration and value is probably acceptable. New services could prove more difficult
3 (see paragraph 5 below). More could be paid for existing services if it can be shown that
Py the cost of the renegotiated package is no less economically advantageous than the next
best offer in the original competition (IBM’s). There is some scope for this although it is
limited since in cash terms Pathway’s offer was five per cent more than IBM’s.
4 to restructure the contracts to remove the benefit payment card, as proposed in
option 2?
S
Treasury Solicitor believes the answer is yes provided BA withdraws entirely from its
contract with Pathway (as BA proposes) because on present information they consider
POCL not to be covered by the procurement directives. If BA cancels only parts of its
contract with Pathway, Treasury Solicitor believes there is some risk of challenge to BA
and POCL. In this case the Programme Lawyer believes there is minimal risk on grounds
Ges
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that Pathway are in breach of contract. If POCL were covered by the procurement
directives the likelihood of successful legal challenge would depend on whether POCL
could proceed with the Horizon platform without prejudicing other potential bidders who
could have provided the platform without the benefit payment card.
ry
=
5 for BA then to renegotiate with ICL for provision of the Order Book Control System
(OBCS)?
EC public procurement law would require BA to hold a competition for the provision of Es
these computer-related services, unless the value of the consideration for the services was
below the current threshold (£104,435). We believe the value of a project to deliver the
OBCS system to be substantially above the threshold.
6 for POCL to procure banking services from ICL without retendering? &
POCL envisaged from the outset that banking facilities would be part of the functionality
of Horizon. POCL believe therefore that there should be no question of retendering for this
work. -
On the basis of current information Treasury Solicitor believes POCL is not covered by the- &
procurement directives and therefore POCL can, in any case, procure banking services
from ICL without retendering. Fa
Under contract law:
7 Would BA/POCL be liable for compensation on termination? i
If BA or POCL terminated “for convenience” they would have to compensate ICL
according to a schedule of payment set out in the contract. If termination took place this
year, BA would pay £129 million and POCL £205 million.
&
If BA terminated on the basis of ICL’s breach of contract, ICL could be liablé to BA for
up to £200 million. .But ICL would vigorously contest that they were in breach. It is highly
likely that they would sue for wrongful termination and substantial damages. If BA lost
they could be liable for up to the sum available for termination “for convenience” ie £129
million if they terminated this year.
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Annex G Analysis of financial flows
G.1 This annex analyses the financial impact on the public sector of the three options discussed
: in the main report. The figures are subject to varying degrees of uncertainty and should be
treated with caution: they can only be broadly indicative. Key assumptions for each option
are:
Key assumptions underlying options
Option 1 Option 2 Option 3
Horizon system for POCL Continued Continued Cancelled
Benefit payment card Continued Cancelled Cancelled
Roll out of system starts January 2000 January 2000 -
Roll out completed September 2001 September 2001 -
BA commitment to September 2007 September 1998 September 1998
contracts with ICL ends
BA commitment to floor September 2006 September 2006. September 2001. BA
payment to POCL ends negotiates terms for
residual use of paper
based methods after
this date.
BA moves to ACT Over a period of 3 years I Over 3 years from Over 3 years from
starting leading up to October 2001 to 2004 October 2001
end of contract,
POCL introduces banking
Building on Horizon
Building on Horizon
POCL commissions
services platform - technology in I platform - start by new system - limited
place by October 2001; I October 2001; fully in services from October
services up and running I place by October 2003 2001; fully in place
by October 2003 by October 2003 .
Fraud control system for Order book control Order book control Some equivalent
«I paper based transactions system built into system built into system based on that
Horizon system Horizon system now used in London.
DSS savings
G.2 Net administrative savings are based on BA modelling and are judged to be reasonably
robust. Changes in administrative costs are driven by the number of transactions paid by
ACT. However a large proportion of the current administrative costs of paying benefits is
the fixed payment to POCL for handling order books. As ACT increases, variable
payments to POCL reduce but the fixed payment remains. When ACT reaches 100% of
benefit transactions total savings-against the baseline are £440 million a year.
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G.3__ Programme savings are expected reductions in fraud associated with paper-based payment
systems. They therefore accrue both with the benefit payment card and with ACT. Fraud &
savings are estimated to reach £135 million a year when order books and girocheques are &
fully phased out. .
G.4 The payment for the “unbanked” assumes that about half of those benefit recipients who a
do not currently have a bank account would be very unattractive to the banks (due to a _
variety of reasons such as low incomes, likelihood of immediate withdrawal of benefit or Fe
a (perceived) high risk of default). BA start from the position that they would not pay the
banks to set up simple credit only accounts for these individuals, but we have assumed that
an upfront payment of £10 per account with an on-going charge of £20 a year would be
required as an incentive to the banks. The analysis assumes action is taken to provide bank
accounts for this group early on in the process of transfer to ACT.
Impact on POCL
G.5 In contrast to the BA figures, the modelling of the impact on POCL of each option is
judged to be less robust.
G.6 The first round impact on POCL net profits is based on POCL modelling of the impact of
reduced BA income - both directly and indirectly through loss of footfall. POCL’s figures
suggest that the total loss of BA income of around £400 million would turn net profits, x
currently £30 million a year, into losses of around £270 million a year. A large proportion EI
of POCL’s costs are fixed, and so a reduction in income is not matched by a significant
reduction in costs. In order to reduce,costs POCL must close offices, which in tum reduces
income. The more time that POCL has to manage changes to the network, the less likely
this process becomes a spiral of decline. This is discussed further in Annex C.
G.7 _ Itis assumed that POCL losses increase towards this figure as ACT increases - although
recognising that under options 1 and 2 POCL is still protected by the floor payment from
BA until the contracts end (it is not, however, protected against footfall losses). Once 100%
ACT is achieved it is assumed that POCL’s net profitability remains negative over time but
gradually improves as the network is restructured and costs are driven out. ,
G.8 As income eamed from benefit transactions and associated footfall reduces then the
commercial attractiveness of sub-post offices will decline. Legally POCL is required to
compensate sub-postmasters by an equivalent to 26 months remuneration if their post
offices are compulsorily closed. It is likely that POCL would be placed under significant
pressure to compensate sub-postmasters if the Government announced a switch to payment
of benefit to ACT. The options therefore include a sum for compensation (based on POCL
modelling) which broadly reflects the number of post offices that would close under each
scenario.
s
§
G.9 The potential income from providing simple banking and financial services is highly
speculative. It is assumed that POCL generates income from three sources:
RN ORGY
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- the cash handling business (about £25 million a year);
. by capturing a small share (between 5 and 10%) of the £2 billion cash withdrawals
market;
- by providing access to bank accounts and cash withdrawal facilities for benefit
claimants who wish to continue to obtain their benefits across PO counters. It is
assumed that POCL is able to negotiate a fee of £20 per account handled. The
ability of POCL to retain the benefit business as ACT increases varies under each
option. POCL believe that they would be able to retain around 65% of those
transferring to ACT when their banking services are fully operational - but that in
the earlier years the retention will be less. The analysis assumes that in option 1°
retention rates are higher than in option 2 and 3 (since POCL argue they will be
able to retain more business with the benefit payment card).
G.10 These estimates are, in the Working Group’s judgement, optimistic about the possibilities
for income generation from banking services - given the highly competitive environment
in which POCL will be operating.
G.11 Set up costs under option 1 reflect POCL assumptions (confirmed by ICL Pathway). Set
up costs in option 2 assume that POCL will need to pay around £75 million a year to
Pathway to remunerate the investment (since payments for the benefit card have been
removed, but costs to ICL are not expected to reduce significantly). Set up costs under
option 3 are based on the cost of a replacement technology for POCL (expected to be
somewhat cheaper than Horizon) plus an interim banking facility to deliver banking
services by 2001/2.
G.12 The impact on the network of post offices was provided by POCL modelling, and are
against a baseline of urban and rural closures over time. The figures are highly uncertain.
POCL argue that about 4,000 urban and 500 rural offices could close whether they loose
40% or 100% of BA income. This is discussed further in Annex C.
Exit payment to/from ICL
G.13_ BA and POCL’s starting point is that ICL are in breach of contract due to their failure to
meet a key project milestone. If the Horizon project had to be re-scoped (option 2) or
cancelled (option 3) they would argue that ICL was liable for costs of up to £335 million.
However either of these options would be dependent on a negotiation with ICL who would
argue forcefully that the delay was due to the contracting parties. It is assumed for the
purposes of the analysis that no payment is made to ICL, but the summary table below
*shows a range of possible payments.
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&
£ billion Option 1 Option 2 Option 3 Pe
DSS admin savings I 0.4 1.0 13 &
DSS fraud savings 0.9 0.8 0.8
NetimpactonDSS I 12 19 21
Net impact on 0.2 -0.6 -1.2
POCL
overall NPV saving I 1.4 13 1.0
exit payment toICL I 0 -0.2 to +0.3 -0.2 to +0.3
G.14 These results should be interpreted carefully. The estimates of the impact on DSS are much
more robust than the estimates of the impact on POCL. With these caveats, the results
suggest:
- the most cost-effective options from DSS/BA point of view are either option 2 or
3; .
- however when the impact on POCL is taken into account option 1 and 2 look more
attractive; .
x
ba
- but the margins of error in this exercise would suggest that caution should be &
exercised before ranking options. .
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HORIZON: SUMMARY OF CENTRAL OPTIONS
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV@6% NPViD6%
Baseline to 2010 to 2005
DSS administrative costs 530 530 $25 520 520 sis Bit} 510 $05
CAPS costs 100 20 20 20 20 20 20 20 20
total administrative costs inc. CAPs 630 550 S45 540 540 535 535 530 525
DSS programme savings (ESNS) 70 70 50 $0 $0 50 50 50
“Sof claimants paid by ACT 30% 31% 32% 32% 33% 33% we 35% 7
6 of transactions made by ACT 13% 14% 16% 16 t 18% 19s
POCL profits €m 30 25 10 20 50 60 <70
POCL network mural 9000 8800 8400 8000 7800 7600 7400 7200 7000 6800
urban 10000 9760
total 19000 18560
9290 9050 8810 8570 8330 8090 7860 7620 7280
17690 = 17250 16810-16370. 15930 15490 15060 1462014080
1 Continue with project on present forecasts then start to move to compulso) 1 mm 2001/5 before tI il of the contract In Sept 2006
DSS net administrative savings (£m) 30 (8S 0 15 20 20 9 200430435 "494 “4s
contingency 0 0 0 0 0 “10-10-1010 -28 0
DSS programme savings (£m) $0 1350135138 BS BS S35 868 490
payment for “unbanked* 0 ° 0 0 8 3000 «33232 86 5
Total DSS savings (£m) -80 20 150 155 147.5 190 293523528 1248 340
‘tb of claimants paid by ACT 30% = 31% 32% 328% 100% "
#6 of transactions made by ACT MY Ste 15% 168s 87%
first round impact on POCL profits Em 0 10 30 40 90 © 190-200 “42 108
compensation to subpostnasters ° 0 0 0 AS Sl 24 0
cost of banking tecluiology for POCL 0 «10 0 C) 0 0 0 -16 -16
profits for POCL from banking &m 0 0 0 9 3137137 364 17
Total impact on POCL 0 0 30 49 18 68-78 182 109
impact on PO network
ural t) 0 0 0 o 0 0 0 0 0 0 0
urban 0 MO 48 710 950 1190 ©1430. sM470—SsASIO «S80 15901630
total 0 0 480 «= 7109809) H30.-——sA7O.Ss«ASTO- 15501590, 1630
& i
NET IMPACT ON PUBLIC SECTOR 1430 Add
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1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NPV ai 6% NPV 46%
2 0 id
DSS net administrative savings (£m) 10 AS Ss lS 25 1s 120 435 45 BS BS 435 1306 87
contingency 10-10 10-10 100-10 1010 1000-10 st “84 +56
DSS programme savings (fm) o $ 90 130 B50 BS BSS 135135 135 847 469
Payment to banks/POCL for “unbanked" . o 3 -20 30 3B 32 32 32 32 32 205 LIS
DSS savings (£m) 2000-28 25 118168 528 528528 196s 385
f claimants paid by ACT 20% 42% 70% 88% 100% fy 0
f transactions made by ACT Me 2% 53% TR 9% 0 o
firat round impact on POCL profits én 0 0 10 30 40 $0 299 tog
compensation to subpostmasters ° 0 0 0 +50 “$0 -209 69
coat of banking technology for POCL, ° 0 «10 1s 1S 1s 326 235
profits for POCL from banking &m oO ° ° 2 B 63 272 96
Total impact on POCL ° 0 o 2 2 18 -561 99
impact on PO network
rural 0 t) 0 0 C) ° 0 . $00 -1$00 -2500
- urban 0 0 o 0 0 ° 0 $00 ©1000-1500
total 0 C) C) 0 0 0 0 -1000 2500 4000
NET IMPACT ON PUBLIC SECTOR 1303 286
3 :
DSS net administrative savings (&m) 10 30 435 435 ABS 433 435 1576 358
‘contingency 10 210 10 10 10 10 84 56
DSS programme savings (¢m) 0 90 135 133 1335 35 347 469
Payment to banks/POCL for "unbaked" ° 20 32 32 32 32 +208 oll
Total DSS savings (£m) 30 528828 58528 2135 655
*bofclaimants paid by ACT Atte toot 100% 100% — 100%
‘eof transactions made by ACT 22% 99% 100% 100% 100%
first round impact on POCL profits £m ° 220 198 17 120 -68L +193
‘compensation to aubpostmssters 100 ° 0 0 0 383 “383
‘coat of banking technology for POCL 0 47 (87 67 61. -206 “119
profits for POCL from banking Cm 0 48 49 48 48 208 nR
‘Total Impact on POCL -100 29-216 1660-139 1162 624
impact on PO network:
rural 0 400-2100 -3400 4200 15004750 4750" 4750 4750 4750-1750
urban 0 =160) 1320-2490 2650-2650 -2820 -2580) -2340 -2110 +1870 +1530
total O +1160 3420-5890 6830-7150 -7870S -7330- -7090 +6860» 6620-6280
NET IMPACT ON PUBLIC SECTOR: 912 a
Notes .
1 A negative saving means an addition to costs .
2 Baseline assumes “business as usual* with no Horizon
3 Bach option is expressed as a change relative to the baseline :
4 NPV figures for option 2 and 3 assume that no compensation is paid either by or to ICL
‘5 Note that the modelling assumes a contract end date of September 2006 in Option 1, rather than September 2007 as in the main report (the timing of the switch to ACT is unchanged),
I was not possible to reflect this change to the specification of Option 1 in the modelling in the time available, However the impact on the financial flows is expected to bo minimal,
pompes pee PRrwy eat Coo he Mc) ieee CPE
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6. Report of the Independent Panel
BA/POCL Automation Programme Review
Independent Panel
Report
Adrian Montague
Bill Robins
Alec Wylie
July 1998
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CONFIDENTIAL - COMMERCIAL
BAPOCL Review - Independent Panel report
oa
§ CONTENTS Page
_ EXECUTIVE SUMMARY... 0.000 e cee eee ee eeeececeeeeeeee eens eaeeneneneeeeenes 2
g SUMMARY OF RECOMMENDATIONS ........ 0c ccc eee eee c cece nce e cette eee eeeeeeeee 4
. PARTI-INTRODUCTION ......... 3
u A. Terms of Reference 5
B. Methodology .... &
on Business drivers ... &
8 D. Brief description of the system ... ane
- PART Il - THE PANEL'S FINDINGS AND RECOMMENDATIONS ............-- - 40 7
4 A. Current Status of the Programme ........ 19
& B. Solution Design and Fitness for Purpose 40
Es) Cc. Future Proofing .......... 42
- D. Timetable for completion . a3
E EB. Programme management, organisation and structures .. 44
F. Strategic Commitment .. 45
G. Likely costs of delivery .. - 418
& PART Ill - RESIDUAL ISSUES AND RISKS ... + 48
A. Strategic issues . 48
on B. Critical path issues . 43
BE C. Operational issues ... - 412
we
st PART IV - SUMMARY OF FINDINGS .........20 ee cece cece eee ee eee eeeceeseeceeeeees 24
us ANNEX A - THE PANEL'S VIEW OF A POSSIBLE WAY FORWARD .. + 22
Option 2: Partial Restructuring .. 22
&2 Option 1; Full restructuring . 23
St Weighing the options .. 24
Financial Implications 28
Conclusion .......... 28
Implementation of a restructuring . 28
Contractuallegal issues ........... se eeee ~ 22
ANNEX B - THE INDEPENDENT PANEL'S RULES OF PROCEDURE .. 28
ANNEX C - THE PANEL'S MEETINGS WITH THE PARTIES ...........-2.0 ee eeeeeeeeeee 34
ANNEX D - OUTSTANDING ISSUES .... 0... cece cece cece ete eens see ene eeeeeeneees 32
oy
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® CONFIDENTIAL - COMMERCIAL
ry BAPOCL Raview - Independent Panel report
3 EXECUTIVE SUMMARY
B
Background
S
4 +. InMay 1996, the Benefits Agency (BA) and Post Office Counters Limited (POCL) signed PFI
x contracts with ICL Pathway. Pathway would set up and maintain a secure, automated
infrastructure for POCL, to allow benefits to be paid to customers presenting a special
magnelic strip card and to provide a platform for other POCL business,
. Through the programme, BA aims to eliminate benefit encashment fraud, provide better
accounting and management information, reduce administration costs and improve service
delivery. POCL aims to maintain its income from benefit payments and other transactions
with benefit customers, replace old systems, modemise the network and develop new
services and commercial opportunities, with Pathway as a partner.
. In the light of concems over progress, this Panel, chaired by the head of the Treasury Task
Force on Private Finance, was set up to make an independent assessment of whether the
programme was. technically viable, if so how quickly it could be completed and at what cost.
Findings
. The programme is complex, probably the biggest of its kind. Its scale, and particularly the
development work required, were underestimated initially. The parties have since increased
the resources devoted to the programme, but a range of issues remain to be resolved.
. Our view is that the programme is technically viable. There must be some risk around
scaleability and robustness. because the system has had to be tested at the level of
component parts, but we are satisfied these risks are being well managed by Pathway.
wy . There is good evidence of future proofing at all levels. The basic infrastructure is very robust
for the future and, in the main, industry standard products have been used. The system
should allow POCL to compete for new business in a variety of markets, including banking
and financial services. New applications based on smartcard technology should be relatively
straightforward and economic. If on-line applications are required, they may take longer and
require more investment.
. A further nine months delay to the programme is our best forecast, with September 2001 for
national rollout completion. Critical path issues will have to be resolved fast to make this -
Possible, and the date could be brought forward with commitment and goodwill on all sides.
. The new Horizon Programme Office in POCL has a vital role. The parties need to ensure it
. has the power and the resources to drive forward the whole Programme end-to-end and to f
il resolve critical outstanding (and future) issues.
~ . Driven mainly by timetable slippage, the sponsors’ business cases are eroding. The direct
cost of delay is estimated at £180m, over half of which falls to the sponsors. Potential
savings from fraud reduction would also be delayed. Pathway, on the basis of the figures it
has provided, would make an overall loss if the contract continued on its present terms and
would require an extension to break even.
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Possible way forward
biz)
. Given these findings, we sought to find a viable way forward for all the parties, subject to
negotiations about the detail. Although the parties did not all agree, we believe that a
restructuring of the full programme could offer such a way forward.
. This restructuring would extend the use of the card beyond the current contract end date. BA
and POCL would prepare for a rapid increase thereafter in benefit payments via the banking
system (ACT). POCL could by then be ready to offer a competitively priced service for
customers who still wished to use Post Offices for access to cash in this new environment.
Pathway would be closer to recouping its investment.
: A second option, less risky in programme management terms, would be to de-scope the
programme by stopping the benefit payment card, while still allowing time for BA and POCL
to prepare for ACT. However in our view this option would run a higher risk of protracted and
costly contractual dispute, possibly leaving POCL without an automated network. It would
also prolong the use of paper based methods of payments.
. The first option (full restructuring) may offer the prospect of better value for money in the
longer term although, to achieve this, the programme would need to be driven much harder
and more professionally than so far. -
. If Ministers were to decide on any restructuring, it would be for the parties in negotiation to
. agrée the details.
. We suggest a neutral ‘troubleshooter’, directly responsible to Ministers and with their full
confidence, be appointed to assist this process, to ensure all the parties give their full
commitment to implementation of the programme and that rollout is completed at the earliest
agreed date.
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SUMMARY OF RECOMMENDATIONS
To help the reader, we include below ‘headlines’ for our recommendations, with paragraph references
to the main body of the report:
22)
Paragraph
The need to commit to a firm baseline and plan becomes critical over the next few weeks. 23
Lost
. As preparations for national rollout proceed, the need to clarify the resourcing and functioning \
q - of POCL’s Service Management organisation will become increasingly urgent. ........ 32
bt
7 . We see considerable weight falling on the Horizon Programme Office, which needs to be
: properly resourced in terms of numbers and skills. . - 52and 92
zy .
oy . All parties should agree to an “open book” approach so that an end to end plan for the
programme can be arranged and driven through by the HPO..............0..eee eee 56
sa :
& . The HPO must drive for resolution of critical path issues before end July.. . 57 and 93
o . BA's constructive engagement in the programme management process will be needed to
aS bring the programme to a successful conclusion. ........... 0c eeeeeee eee e cence 59
. The HPO should manage the leaming process from Release 1c and testing/trial activities 62
by . Resolution of a number of strategic issues is fundamental to the programme .. . 84
. BA can do more to ensure that the other parties have confidence in its plans. ......... 88
Sy .
Pathway also has work to do to convince the other parties that the solution is complete and
. 89
scaleable
i . The current adversarial approach of the parties will have to change...............006 91
rs . HPO and the Horizon Programme Board need real authority within POCL, with a remit to
Hed drive forward progress on outstanding acceptance issues... ..........eeeeeeeeeeeees 92
ec .
Depending on the way forward Ministers decide, we would also suggest:
i . A neutral ‘troubleshooter’, directly responsible to Ministers and with their full confidence,
Should be appointed. ... 2.00... cece cece eee e cece cence een ceeteeeeeee Annex A.
. The Post Office Review should consider whether refinements to POCL's present
management structure would better allow it to implement the changes required. ... Annex A
. ‘The opportunity should be taken to restructure the contractual relationships ...... Annex A
é
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PART I - INTRODUCTION
A. Terms of Reference
1. In May 1996, after a two-year PF] procurement process, the Benefits Agency (BA) and Post
Office Counters Limited (POCL) signed contracts with ICL Pathway (Pathway) under which Pathway
would provide BA and POCL with a wide range of services. The programme involves the setting up
and maintenance of a secure, automated infrastructure for POCL, which will allow payment of social
security and other benefits across Post Office counters to customers holding a magnetic strip card
and provide a platform on which other POCL business could be transacted.
2. In the light of concems over progress with the programme, a Panel chaired by the head of
the Treasury Task Force on Private Finance was set up to make an independent assessment of
whether the project was technically viable and if so how quickly it could be completed and at what
cost. The Panel was to report to a working group of officials from HM Treasury, DTI and DSS.
rad
B 3. This report fulfils that remit. Specifically we, the Panel, were asked to assess:
. whether the project can deliver a fully functioning system which meets the project
& specification, and integrates fully with BA and POCL computer systems;
B . whether the timetable for completing the systems development, and starting and
completing roll out, is deliverable and whether the necessary managerial and
— organisational structures are in place;
ey . the likely costs of delivery, under current contract dates and with extension; and
: in each of these areas, the risks associated with these assessments, and whether
robust monitoring arrangements and disciplines are in place.
4. All parties expressed a willingness to consider suggestions the Panel might wish to make for
& taking the programme forward successfully, and we have proceeded on the basis that our terms of
a reference should be read as including a power to make recommendations. Our view on a possible
oe way forward is at Annex A. The Panel's rules of procedure are at Annex B.
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bay B. Methodology
& 5. We have received written submissions and oral presentations from all the parties both
EA separately and together. We have seen Pathway products demonstrated and been briefed on the
wider Govemment information systems agenda by the Central IT Unit (CITU). The panel's schedule
of meetings with the parties is at Annex C.
6. PA Consulting has assisted us with detailed technical and programme planning
investigations, conducting further interviews with the parties: The report draws on the parties’
submissions and discussions with us, PA’s findings and our independent view. A preliminary view of
our findings has been discussed with the parties.
7. We would thank each of the parties for their open and co-operative approach to our
investigations, recognising that their contributions have been given without prejudice to their
contractual rights and remedies.
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c Business drivers
8. In assessing the viability, timeliness and cost of the programme, we started from the parties’
business drivers, taking account of how they may have changed or been added to since the start of
the programme. The programme has to satisfy the various interlocking objectives of the parties and
.is, therefore, complex and wide-ranging.
Benefits Agency
9. For BA, the business drivers are: a
. to eliminate benefit encashment fraud, estimated at £190m per year;
. to provide adequate accounting and management information for BA;
. to reduce administration costs; and
. to achieve a fundamental improvement in service delivery.
Offi inte $
10, For POCL, the drivers are:
. to maintain income from benefit payments and ‘footfall’ (ie other POCL transactions
with benefit customers); .
. to replace legacy systems and modemise the nationwide Post Office network;
° to provide a platform for modemisation and development of other client services;
and
. to acquire a strategic private sector partner to bring additional commercial
opportunities.
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11. Pathway's objectives at the start of the programme were:- . &
. to meet sponsors’ service needs by integrating a number of systems; .
. to do this at a competitive price while achieving a reasonable rate of retum over the E
period of the contract; €
. to establish a world class solution which could be marketed intemationally; and &
. to become POCL's preferred strategic partner in the development of its wider £
business. . com
12, These remain Pathway’s objectives, but the first has had to be expanded to include &
additional design, development, building and testing of the systems needed to deliver the services =
required. The enhancements required and delay in their implementation has caused a deterioration in
the financial retums the programme offers to the point where Pathway asserts that an extension of
the contract is required to restore its financial equilibrium. .
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Wider Goverment
13. Beyond the parties to the contracts, the Government has an interest in the programme's
potential contribution to a number of objectives, including:
. the preservation of the social value of a nationwide network of POs;
. the reform of the welfare system:
. a move to an ‘active modem service’ for benefit customers:
. the target of completing 25% of Government transactions electronically by 2002; and
. the delivery of government direct.
Sad
b. Brief description of the system
i
t
44, The programme comprises a number of interdependent systems and services, requiring work
to be completed by Pathway, BA and POCL. Somewhat simplified, these systems are as described
and shown in the diagram below,
415. ‘On the benefit payment side, in the Pathway domain:
- the Post Office counter clerk uses the Benefit Encashment Service (BES) to make a
a benefit payment to customers presenting a benefit payment card. The clerk swipes
the card through a magnetic strip reader and is then prompted by the systern through
the rest of the transaction:
. BES uses data from the Card Management Service (CMS), which holds details of
cards issued, in service, stopped etc, and from the Payment Authorisation Service
sl (PAS). which holds detaits of all payment instructions received by Pathway:
a . CMS and PAS link via the CAPS Access System (CAS) to BA systems;
oe > Payment Card Data Files (PCDF) link CMS to de la Rue which produces and
despatches cards and pick-up notices to customers:
. separately, the Order Book Control Service (OBCS) is a anti-fraud measure which
checks bar coded order books (until such time as they are superseded by the card)
against a national ‘stop’ list.
16. In the BA domain, CAPS systems exchange data with CAS. These systems are:
- the Personal Details Computer System (PDCS), storing personal details for BA
customers;
* the Customer Payment Computer System (CPCS), containing details of payments in
and out: and
. an accounting system (PACS);
. these systems rely on Feeder Benefit Systems, which support each benefit payment
System and provide details of payments due; and separately
s - the Electronic Stop Notice Control System holds details of stop notices,
17. For POCL and its other clients, Pathway provide:
q . an Automated Payments Service (APS) for bill payment and pre-payment using
magnetic strip cards and smartcards; and
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. Electronic Point-of-Sale Service (EPOSS) for electronic cash register functions - the 5
‘glue’ connecting together other services at the PO counter.
18. Pathway’s systems rely on, or provide data to, others in the POCL domain, particularly: =
. the Reference Data system, which holds details of post offices, products, prices, ete Ks
* ihe Host Automated Payment System (HAPS), handling existing automated systems =
and taking a feed from Pathway’s APS; and
. Transaction Information Processing (TIP) taking data from Pathway for POCL's
accounting and management information systems.
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19. Service charges from BA and POCL to Pathway are calculated from a matrix of unit
transaction prices. BA have a separate contract with POCL for counter services, the charges
including fixed, semi-fixed and variable elements, with a ‘floor’ providing that payments cannot fail by
more than a specified amount in any one year, regardless of volumes. A simplified diagram of the
flows is shown below.
RE
Horizon programme payment flows
Benefit Payment Card and other applications
ree
Card Management
and Payment
Authorisation
Service charges
ae.
subcontractors
20. ‘The service interdependencies mean that releases of Pathway systems, CAPS and POCL
feeder systems need to be coordinated. Separate testing of systems, followed by integrated testing of
“model offices’ and live trial, lead to the full national rollout of the service to all post offices and BA
district offices, subject to acceptance tests at appropriate stages. Benefits migrate to the new system
according to a schedule drawn up by BA. Finally the programme is complete and responsibilities for
continuing service provision transfer to the supplier and sponsors.
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PART Il - THE PANEL’S.FINDINGS AND RECOMMENDATIONS
i
A. Current Status of the Programme
21. The programme has moved on since PA reviewed it towards the end of 1997. Indicators of
progress are:
. Release 1c (Ric), a partial solution providing the benefit payment card and OBCS,
has been working satisfactorily in just over 200 offices since November 1997;
Pathway has brought in new technical skills and management resources, increasing
headcount to around 270 staff and introduced new procedures to support the high
level of software development needed;
BA has increased ils resources on the programme and Release 3.0 of its key feeder
system (CAPS) has been given DSS Seals of Approval;
. POCL has also increased its resources on the programme, establishing a pilot
. service management function and a National Implementation organisation, to
support Pathway in preparing outlets and training; the Horizon Programme Office
(HPO) also started work on 1 April 1998.
22, However there remain problems, and difficulties in formally signing-off requirements and
solutions so that delivery dates can be planned and agreed. For example:
. there is not yet a stable baseline requirement formally agreed by all parties on which
plans and key milestones can be agreed;
: the parties have yet to sign off proposals to de-scope Release 2 (originally intended
as the full solution) irito New Release 2 (NR2) a partial solution ready for the start of
national rollout and New Release 2+ (NR2+) the full solution to be available later;
: there is no agreed Acceptance Plan or time-scale for acceptance, which puts at risk
on the timetable for contractual acceptance of the system;
Lea . there is no consensus on the length of Model Office testing, live trial (the final stage
before rollout) and the contingency to be allowed;
& . . there is no agreement on the rate of rollout, or ‘beat rate’;
i
ia . there are no agreed timescales for change control decisions; ce
. version 4 of the Master Plan (covering the whole programme) has not been signed
off and there is no formal agreement about the conditions for deciding that rollout
has been completed; and
. hence the dates proposed for the start of live trial and rollout to all 19,000 post
offices are at risk.
23. Under Pathway's current plans, preparations for national rollout began in eamest on 8 June
1998. This is not a point of no retum, but it does mean that increasingly more significant
commitments will be made on the way to the start of national rollout in April 1999. So the need to
commit to a firm baseline and plan becomes critical over the next few weeks.
B. Solution Design and Fitness for Purpose
24, We believe the’programme can deliver the contracted functionality. The technical
architecture is necessarily highly complex: systems must be separated for contractual reasons; they
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have to have high levels of resilience and security; and they employ a number of different computing
platforms. These factors have been well considered in the design and structuring of the project and
technical architecture.
25. The main architectural issues are scaleability and robustness. We are advised that a solution
of this scale and scope with so many different platforms and products has, as far as PA is aware, no
precedent. We are satisfied that Pathway's approach to design, development and performance
testing is sufficiently rigorous for such a major undertaking. At this stage of development, testing has.
to be based on the component parts rather than the entire system. We believe this has been
completed in an appropriately structured way; indeed it is a strength of the modular nature of the
architecture that this approach can be taken. Significant attention is being given to testing at the
correspondence server level where the highest risk of congestion occurs.
26. Given the size of the system, there is an unavoidable risk that it cannot all have been tested
end to end in eamest. However we are satisfied that Pathway has contingency plans to upgrade
individual components of the architecture, should that prove necessary. We therefore assess the risk
of the entire solution failing to operate as expected to be as low as could be achieved in the
circumstances.
°27. Although we believe the architecture to be viable, there is a concem that the system is
(necessarily) heavily dependent on the third party middleware product 'Riposte’. This risk will pérsist
and steps must be taken to manage this risk over the operational lifetime of the system (in addition to
those steps already taken in the development stages by ICL and Pathway). If, as is confidently
predicted by ICL, this product becomes a Postal industry standard, this risk Is significantly mitigated.
Pathway has also taken steps to cover their dependency on Riposte by holding a copy of the source
code and by training their staff in its use.
28. The complex architecture demands a supply of highly skilled technicians across a wide range
of disciplines. Pathway has put in place extra staff with strong development expertise. There are now
forward resourcing plans and extensive documentation supports the knowledge and expertise built up
in people's heads. PA has been most impressed with the progress Pathway has made since last year
in this respect.
29. The project is probably the biggest of its kind and many of the component parts, although
sourced from industry strength products and companies, are being used towards their current limits
and scale, Pathway has recognised the risks and has in place the controls we would expect to see in
a development project of this scale. .
30. The architecture is modular and as the number of on-line offices grows, so specific server #
types can be added incrementally. Pathway has ensured that, at all levels of the architecture, more
computing power is available from chosen suppliers should that currently planned for reach the limit c
of its capability. . . &
31. There is no reason to suggest BA will not be able to deliver the CAPS functionality required.
Its resourcing and testing of this part of the programme, and its track record so far, all give a
confidence. As with the Pathway systems referred to above, there must remain some risk until the ed
systems are connected together in eamest. The same is true of POCL's parallel work on its feeder
systems (Reference Data, TIP, APS etc.)
RFA
32. POCL has been establishing plans for its Service Management organisation and we are
satisfied that the requirement is properly understood, although POCL has not been able to describe
to PA exactly how the proposed Service Management organisation will be resourced nor say how it
will fit into POCL’s organisational structure. What is clear however is that the system will demand a
Wi
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degree of central control and management not evident in the present regionally based POCL
organisation. As preparations for national rollout proceed, the need to clarify the resourcing and
functioning of POCL’s Service Management organisation will become increasingly urgent.
c. Future Proofing
33. There is good evidence of future proofing at all levels. We have been satisfied that all
reasonable steps have been taken to ensure robust sources of supply and compliance with industry
standards in designing the architecture. Upgrades to software platforms and individual components
are provided for, should they be necessary.
34, The networking infrastructure and the Riposte messaging system use the TCP/IP protocol,
This protocol is becoming an industry standard. The ISDN backbone network is another technology
that will be around a tong time.
35, Pathway has taken steps to ensure the future of the Riposte messaging software, but there
must continue to be a concem about this product unless and until such time as it becomes much
more of an industry standard. Having said that it is worth noting that there are now Post Office
automation projects based on Riposte committed in at least five more countries since this contract
was placed. .
36. There is evidence that the architecture will support a variety of applications, The
infrastructure technology used will allow Intemet type developments. HTML and Java could be used
for expansion into other services. The application code has been written using industry standard tools
and languages such as Visual Basic and Pro C, which ensures that it can be adequately covered in
the future by another agency if necessary.
37. Part of the system design was to make the equipment very user friendly, with touch screens
and the like. Conversion to a "kiosk" type system would be relatively straightforward.
38. The system has been designed to handle smartcard-based applications. Benefit payment
applications use a magnetic strip ‘swipe’ card, but future applications could use a smartcard instead.
If new applications are focused on smartcard technology, then to implement each one should be a
relatively straightforward and economic process as far as the basic infrastructure is concemed,
although the necessary changes to correspondent systems may be more complex.
39. The basic structure to support banking applications will be in place. Pathway will have NT
machines in the local branch, ISDN lines to all branches and a managed TCP/IP network available
across the UK. This will provide the basic, generic structure needed to run local applications on the
counter and to support specialised terminals such as cash dispensers.
40. One caveat is that the whole system is basically designed as a batch system. It can, and
does, go on-line, but the Riposte system is not centred around On-Line Transaction Processing
(OLTP); it works on a regular collection (harvesting ) of messages. The architecture may be able to
Support a reasonable OLTP performance (and Pathway may have tested this) but it is not part of the
contracted functionality. Real time on-line applications, such as those used by the National Lottery,
could therefore require major changes to the system.
41. We do not know whether OLTP will be required to support POCL's future banking
applications. It will depend on the security needed whether, for example, cash withdrawal requires
on-line authorisation. The advantage of smart cards is that significant parts of authorisation can be
local, with less need to go on-line.
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42. Until POCL decides which banking applications are to be provided, how they are to be Et]
provided and, if using a smart (or other) card, on which technologies and standards they are to be .
based, there’will remain some uncertainty about how economically the system will support such a
venture and whether the Riposte architecture poses any limitations. A smartcard route should pose
few problems.
D. Timetable for completion
43. There have been a number of re-plans since the contracts were signed. The latest plan to
which the parties are working (although not contracted) shows national rollout to start in April 1999,
some 21 months later than was initially planned.
44, There is no end-to-end schedule for the entire programme agreed between the parties, and
no end-to-end critical path analysis has been done. We consider this to be a serious deficiency in the
Management of the programme. In order to establish what risk there might be of further delay, PA
carried out their own critical path analysis.
45, The likelihood of further slippage is increased by a number of factors: as
. detailed acceptance criteria and the process for acceptance have yet to be agreed; &
. the parties have yet to agree on: the duration of model office testing and trialling, and “
the contingency to be allowed; the descoping of Release 2 into New Release 2 and
New Release 2+; and which benefits are to be included in the start of national rollout; ~
: Programme management arrangements are still not satisfactory;
° insufficient strategic commitment to the delivery of the programme by all parties; and
: the absence of properly co-ordinated end-to-end planning, and the sheer difficulty of .
co-ordinating the rollout of such an ambitious programme. i
. &
46, Given the disagreements between the parties on timescales, PA had to make a number of Ba
judgements about the duration of key activities. These judgements tended to be on the cautious side,
closer to BA’s view, but not inconsistent with the history of slippage seen so far in the programme. z
=
&
47, Based on this analysis, we conclude that the start of national rollout might be further delayed
by up to 9 months to January 2000. This assumes that all outstanding issues with New Release 2’and c
New Release 2+ are resolved quickly by the HPO (by end July) and a baseline agreed. If so the E
forecast date might be brought forward. <=
48, Once rollout starts, it is planned to continue at a ‘beat rate’ of 300 offices per week. There are
tisks to the achievement of this rate, for example:
. there are no pauses for review, and scaling up beyond, say, 10,000 outlets may give
rise to problems; &
. the rollout of EPOSS, if it requires process changes at the counter, runs the risk of s
disruption to the benefit payment service;
. BA card rollout sequence plans may need to change at short notice; : e
. parallel activity to upgrade parts of the Post Office estate may impose constraints on
rollout; and Ec
: agreement between the parties about the criteria for rollout completion may be hard &
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to achieve.
eGR. ee
49.. These factors have been taken account of in PA's analysis. Harder to model are the
demands rollout will place on POCL organisation, and the stress likely to be caused as its regionally
based organisation tries to cope with a service management approach that demands a more
centralised organisation. With this caveat, we believe that the 300 beat rate has been properly
planned for by Pathway and should be sustainable, leading to a best estimate for completion of
8 rollout by September 2001.
50. In order to de-risk software development and improve the management of software releases,
Sy. Pathway has committed resources both at a significantly higher level and with a different skills mix
& than it had envisaged at the outset, requiring a total re-design of the project team structure and
processes. Pathway's plans are now much more robust, realistic and better resourced in numbers and
Pe skills and, if the issues mentioned above can be settled auickly, there is every likelihood that
5 Pathway can deliver to timescales.
Po 51. BA appears consistently to be able to plan and deliver to timescales. \
& > :
Eo 52, There remains a great deal of work to be done by POCL to develop its programme and
service management capabilities. POCL's planning, for both implementation and service
Sj management of the programme, does not appear to have been given sufficiently high a priority within
B the PO Group. It needs to be properly resourced in terms of numbers and skills. Planning should
provide for and manage an end-to-end critical path, including links and dependencies with its other -
Pa key systems. This planning must be set in the context of POCL's longer term business strategy.
bs)
E. Programme management, organisation and structures
53. The programme is characterised by inefficient decision making processes. The way change.
requests are managed is a particular problem; Pathway are obliged to respond to change requests
within 3 weeks and impact assessments have to be made in 5 days, but no time is stipulated for
decision-making by the sponsors. This imbalance is, in our view, harming progress.
54. The new programme management arrangements since April 1 are intended to improve this.
The Horizon programme office (HPO) has a vital role, but it is not yet operating as planned - for
example joint commercial teams are meeting while the technical and implementation boards are not -
although there are signs of its increasing effectiveness.
55. POCL and Pathway feel that they are collaborating more closely than before. This process of
“joining up" the parties must accelerate and embrace BA. Just as important are stronger links with
POCL's emerging change programmes.
56, We understand there are no end-to-end descriptions of the system and process architectures,
which makes it difficult to plan and manage the programme. Without these, and a master critical path
activity network, alignment between the parties will always be difficult and contentious. All parties
should agree to an “open book" approach so that an end to end plan for the programme can be
arranged and driven through by the HPO.
& 57. The HPO must drive for resolution of all the issues we have identified as on the critical path
(see Part Ill below) before end July, if there is to be any chance of improving on the forecasts we
Fs have made for completion of the Horizon programme.
oo.
a 58, Pathway has demonstrated its capacity to deliver the programme. The evidence suggests
by
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that the primary focus for any leaming from Release 1c has been at Pathway. We found no evidence
of an explicit teaming process across the programme, although there is evidence that all parties have
\ benefited from their experiences of Ric. Pathway has processes (problem management, service
' review, quality audits) to capture R1c experience and have changed Release 2 design and the
production service as a result.
59. While BA has demonstrated its ability to develop and rollout CAPS, it is more remote from
the programme management process. Its constructive engagement will be needed to bring the
programme to a successful conclusion.
60. As noted above, the HPO is not yet working as was envisaged. There is evidence of under-
resourcing in terms of numbers of people, the necessary skills mix and funding. While BA and
Pathway are buying in the resources and skills they need, POCL are using in-house staff where
possible. If the HPO is to drive the programme as a whole, it is essential that key roles in it are
\ resourced to standards comparable with those being achieved across the rest of the programme.
61. In our opinion, there are not enough high calibre staff in the HPO particularly in key positions
such as programme office: only a few HPO staff have relevant experience in managing such a large
and complex programme. As a result, it is our view that the HPO director has been pulled in too
many directions - contractual discussions, POCL business and so on. He so far has had insufficient
time to drive the Programme on a day to day basis and so resolve the issues:that are causing the
Programme to falter. Although as this review has progressed there have been positive signs of
change, we believe that additional high quality resource is needed to support the HPO Programme
Director so that, for example, end to end visibility of all parties’ plans are available, challenged and
then integrated into a critical path network and master plan.
62. There is anecdotal evidence that suggests POCL is not making the most of opportunities
afforded by Ric for improvements to its processes. We have not found any evidence of a process
that ensures sharing between the parties of experiences and lessons leamt. The HPO should manage
the leaming process (from Ric and from testing and trial activities still to come) to ensure all parties
leam appropriately. :
F. Strategic Commitment
63. The HPO's ability to drive the parties to agree and to achieve programme milestones will
continue to be undermined in the absence of shared business objectives for the programme.
64. There is uncertainty about both sponsors’ fong term intentions: BA about altematives to cards
for benefit payment; POCL about its strategy to exploit automation. There is a recognition at POCL
that successful implementation of the automation programme demands a significant change in
culture, however plans to effect this are not well advanced.
65. Over and above the resource constraints noted elsewhere, we believe that the HPO does not
have sufficient authorily for the role it has been given. We see this in two key respects:
: the Horizon programme director does not manage directly the dependencies of
POCL projects e.g. Reference data, TIP, yet the overall programme is dependant on
these projects delivering on time;
. the programme requires substantial support of the POCL business as a whole when it
comes to implementation, use and support of the service. The HPO director is a
member of the POCL top team but we are not yet convinced that the HPO is locked
into POCL's organisation, management and decision making processes sufficiently
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to ensure timely decision making on programme issues.
66. With the proper level of senior management commitment and delegated authority to the
Programme Director, he would be much better placed to drive through the programme with the
minimum need to refer upwards. .
co Likely costs of delivery
aR
67. Increases to programme costs are driven primarily by timescale slippage. BA's costs include
those attributable to CAPS development. In addition, BA will lose potential fraud savings, POCL's
opportunity to generate other non-BA business is delayed, and Pathway lose income from system
charges. .
STEP
68. Based on our forecast of 9 months further slippage, current programme run rates provided by
the parties suggest that direct costs will increase as follows: :
53
Bi BA : £90m
POCL £15m
fe: Pathway £72m
69, For comparison, BA’s forecast total costs on the programme are over £1bn and annual
payments to POCL and Pathway will be around £500m in steady state.
70. We have not verified the parties’ run rates. They may contain an element of negotiating
fe margin and may not take full account of the possibility of reprogramming other work to mitigate the
a2 impact of further slippage. However they seem to us to be a reasonable guide to the costs of delay
for the purposes of this report. :
iJ
cj Pathway
of 71, Pathway tells us it has spent or committed £250m so far and expects to spend a further
bay £250m, much of it already contracted for, to complete the design and build stages, Pathway’s peak
cash requirement will be around £425m and financing costs will therefore be substantially higher than
on budgeted for. On current planning assumptions, income from operations is estimated at £220m,
Fed leaving a deficit of £205m. This takes account of a financing cost of £170m. The cost ‘run rate’ is
ss about £8m per month and steady state income lost for each month of delay is about £14m.
72, POCL has questioned the accuracy of Pathway's cost projections and the true extent of
deterioration in its rate of retum. We have not verified Pathway's figures, although it will be
necessary to do so for the purposes of any commercial negotiations. Meanwhile we believe they
should be accepted as the basis for a decision on the future of the programme.
BA
73. In 1996, the NPV to 2003/2004 of BA's business case was £1bn, taking account of benefit
fraud savings but excluding CAPS costs and savings. When CAPS was taken into account (although
we question whether it is appropriate to do so), the NPV dropped to £730m. On current assumptions
(ie rollout starting in April 1999), this latter figure has dropped to £469m. Currently, the cost ‘run rate’
of continuing with the programme in its development state is about £10m per month (including CAPS
2 RG
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work) and, in steady operational state, the losses are about £15m per month based on the benefit
fraud and administrative savings lost through delay in migrating to the new system.
POCL
25)
RES
74, In 1996, the NPV to 2003/2004 of POCL's business case was £65m. This has dropped to
£46m on current planning assumptions and could drop further to about £22m depending upon the
resolution of outstanding issues and risks. It is estimated that the cost ‘run rate' is about £1m per
month (excluding costs associated with Reference Data and TIP). Operating cost savings of a similar
amount are also being delayed.
75. With the exception of POCL, the parties have now resourced up to the numbers, skills and
experience required for a programme of this scale and complexity. There remain questions about
costs at POCL, partly the resourcing of the HPO but also reflecting our view that POCL has not yet
worked through all the implications of automation. Preparing for and implementing an automated
counter environment and its exploitation, which could involve major organisational change, could
mean a substantial un-budgeted cost.
76. We believe that POCL continues to take an over-cautious approach to resourcing this major -
Programme, relative to the other parties. The POCL business case shows, for example, that the.
resource for national rollout is budgeted at £1000 per post office, that the HPO costs peak at just
under £1m per month and the Service Management Function is budgeted at £2.5m per annum. It is
understandable that POCL will want to keep implementation costs down. Indeed that presumably is
why the PFI route was chosen in the first place. Having noted that, we believe that POCL may well
have to find additional resources to ensure the success of the programme.
a
Ҥ
77. __ A second area of risk at POCL concems the state of its organisational readiness to accept an
automated network. POCL themselves note that this programme “requires a significant culture
change’. This must be registered as a potentially costly risk to the programme until such time as-
POCL sets out detailed plans for implementing any organisation change for automation. These plans
must be able to demonstrate that the confirmed Pathway plans for national rollout can be ‘supported
before this risk can safely be removed.
78. In summary, it can be seen that the financial retum from the programme has deteriorated
significantly for all parties. Pathway, on the basis of the figures it has provided, would make an
overall loss if the contract continued on its present terms. For BA and POCL, the NPVs of the
programme, although positive, have been substantially eroded, and in POCL's case may have
become marginal. . .
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PART Ill - RESIDUAL ISSUES AND RISKS
79. The programme from the start seems to have had two distinct sponsor visions, with no clear
Govemment-wide view. There has been no clear single owner of the programme. Perhaps as a
consequence of this, we have seen a lack of grip at project level (at least until early ‘98), leading to
poor conflict management and a lack of riortisation, There is some evidence of this changing, but
the change needs to accelerate.
aus
3
80. Despite recent changes to the programme management arrangements, the supply chain
remains unclear. This might be addressed in contractual negotiations if a restructuring of the
programme were to be approved.
81. On a short operating franchise PFI, with business cases sensitive to delay, specification of .
Fo) sponsor requirements was initially only at a high level. The supplier was prepared to-enter into a fixed
ie price contract to deliver against them, but underestimated the programme complexity and the
resources required in light of the sponsors’ specification. Delays so far have meant that for Pathway
to generate a positive rate of retum is now heavily dependent on generating non-BA business for
8 POCL.
£
82. The relationships between the parties can be characterised by a low level of confidence in
various aspects of the eventual solution and in each other.
83. The parties presented us with a number of outstanding issues for resolution. Some have .”
been referred to already. Many we see as ‘operational’, ones which we would have expected to have
been resolved by routine programme and change management procedures, Others - identified below
as ‘strategic’ or ‘critical path’ - have more serious implications. The full list, with our assessment of
which party should be taking the lead in resolving each one, is at annex D.
' ~
A. Strategic issues
84. The following issues are fundamental to the programme, with severe risk of its failure if they
remain unresolved:
8 . all parties. need sound business reasons for a full strategic commitment to the
s programme, with a common vision and incentives for all to make it work ina
reasonable timescale; original business cases are substantially eroded or no longer
viable, and there is no process for resolution (we will retum to this in Part V below);
. BA's commitment is perhaps hardest to achieve while the lower unit cost of an
altemative payment mechanism - Automated Credit Transfer (ACT) for at least the
majority of its customers - appears so attractive; any lack of commitment on BA's
part could be highly corrosive; conversely a strategically committed BA could play a
major role in the success of the programme;
Pa . the parties need to ensure the HPO is resourced and empowered to champion and
PH drive forward the programme; POCL must also convince the other parties of its
om organisational capacity for rollout and service delivery, all within the context of a
clear, well-implemented future business strategy;
wa
= . Pathway must convince first POCL, then BA that Horizon can be exploited
ad cost-effectively to support banking, financial services and other applications for
* clients in and outside government, bringing economies of scale and reduced unit
# costs for POCL clients;
& . the lack of a single owner for the project is a major drawback.
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B. Critical path issues =
et
85. There is'a further group of issues whose resolution is essential for the parties’ agreement %
about programme milestone dates, especially the start of live trial and national rollout. Agreement is
needed quickly and should not wait for commercial and legal discussions to be complete.
86. It is our view that, with goodwill from the parties and the right drive from the HPO, all critical ES
issues can be satisfactorily resolved; indeed resolution is close on some, for example Soft EVP. The
big issues of uncertainty relate to:
° the duration of Model Office Testing and Live Trial; current disagreement centres on -
the amount of contingency needed;
. the ability of each of the parties intemal Programmes to all come together at the right
time to allow Live Trial to commence,
. the ability of the parties to agree acceptance criteria and process so that acceptance Pa
is achieved in a timely way and, &
&
° the risk that BA and POCL business process will need to change once the encl-to-end ~
impact of the system has been fully assessed. oa ra
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87. In most cases it is the HPO which should be leading the resolution of these issues. It must,
for example, take early steps to:
. develop a master, baselined plan for delivery of contracted functionality; which takes
account of sponsors’ other work programmes and reaches across interfaces with
other systems, including POCL feeder systems;
. finalise NR2+ contents description, resolving outstanding agreements-to-agree;
. agree an achievable start date and duration for live trial; :
. get agreement on how far national rollout can proceed before NR2+ is available; and i
oe speed up acceptance and change control processes. ~
88. BA can do more to ensure that the other parties have confidence in: =
° its plans to rollout CAPS; *
- the schedule for migrating benefit types to the new system; and
. that CAPS personal data quality will be sufficient not to affect rollout adversely.
89, Pathway also has work to do to convince the other parties that:
. the essential nature of the security requirement has been taken seriously; a
° service management products are fully available and scaleable;
. subcontractors will be properly managed; and -
. there is a consistent, complete and scaleable technical design.
Cc. Operational issues
30. There remain a further group of ‘operational ' issues, for example around:
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2B . the effectiveness of BA data cleansing;
. the use of contingency in the programme timetable;
a . problems with EPOSS;
. staff training and competency; and
. the proposed solution for small offices where full Horizon installation is difficult,
e24
91. We would have expected these to have been resolved at working level. With goodwill and a
willingness to compromise on all sides, these should be solved once key milestones are set. However
the current adversarial approach of the parties will have to change.
ea
92, We see considerable weight falling on the HPO, with the Horizon Programme Board used
effectively to reconcile conflicts and ensure progress. Both will need real authority within POCL, with
a remit to drive forward progress on outstanding acceptance issues. They must demand tough
delivery schedules of Pathway and command the confidence of POCL's biggest client (BA) to
concede authority over the programme to the HPO. Relationships with other POCL clients will also
om
a be important in developing new business.
rs
93, In summary, if there is a commitment to the programme at the highest level (le with the
& strategic issues resolved), the main risk lies in the ability (or otherwise) of the 3 parties to clear all the
Bee critical path issues (listed below for convenience) by end July.
a
8 Critical Path Issues for resolution before end of July 1998
byHPO I+ Interface management
a . Resolution of outstanding Agreements-to-Agree
. Baselined plan for delivery of contracted functionality
. Finalisation of NR2+ contents description
B . NR2 acceptance for live trial by Jan 99
a . NR2 limited to 4000 outlets
S . Sufficiency of 11 weeks for live trial
. Change control processes
& . Need to take account of sponsors’ work programmes
3 . Programme master plan
: Speed of acceptance process
fi by Pathway I + Management of Pathway subcontractors.
a . Consistent and complete technical design
. Service management products available and scaleable
: Card production
. Scaleable design
. Security requirement taken seriously
a byPOCL I*+ POCL estate readiness
Bal . Horizon Programme office viability
Bos . Issues with reference data
: Large scale FAD code changes
& by BA . Scheduling benefit migration
& . Card rollout
° CAPS performance
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PART IV - SUMMARY OF FINDINGS.
94, The.BA/POCL programme is complex, probably the biggest of its kind. Its scale, and
particularly the development work required, were underestimated initially. The parties have since
increased the resources devoted to the programme, but a range of issues remain to be resolved.
95. Our view is that the programme is technically viable. There must be some risk around
scaleability and robustness because the system has had to be tested at the level of component parts,
but we are satisfied these risks are being well managed by Pathway.
96. There is good evidence of future proofing at all levels. The basic infrastructure is very robust
for the future and, in the main, industry standard products have been used. The system should allow
POCL to compete for new business in a variety of markets, including banking and financial services.
New applications based on smartcard technology should be relatively straightforward and economic.
If on-line applications are required, they may take longer and require more investment.
97. A further nine months delay is our best forecast, with September 2001 for national rollout
completion. Critical path issues will have to be resolved fast to make. this possible, but the date could
be brought forward with commitment and goodwill on all sides.
98. The new Horizon Programme Office has a vital role. It needs to be given the power and the
resources to drive forward the whole programme end-to-end and to resolve critical outstanding (and
future) issues.
99, Driven mainly by timetable slippage, the sponsors’ business cases are eroding. The direct
cost of delay is estimated at £180m, over half of which falls to the sponsors. Pathway, on the basis of
the figures it has provided, would make an overall loss if the contract continued on its present terms
and would require an extension to break even.
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ANNEX A - THE PANEL’S VIEW OF A POSSIBLE WAY FORWARD.
1. Given the findings in the body of the report, we sought to find a way forward on which all the
parties might agree in principle, subject to negotiations about the detail. We considered all the
options:
. Restructured full programme
. Restructured partial programme - with no benefit payment card
Extend the current programme
I. Continue the programme as planned
.. Partial termination - no benefit payment card
. Complete termination ‘
Ce) Go ES a ate
OuUpwno
59
2. Taking the options in reverse order, each of the last four has fatal flaws if an agreed way *
forward is sought - one or more of the parties would be unable to accept it:
° termination of the complete programme would leave POCL's automation plans set
. back for at least two years (and very possibly more after potential litigation, re-
xy
g advertisement, procurement and implementation), with the likely loss of non
ie
al Goverment business in the meantime; Pathway would face a significant loss of
prospects, reputation and revenue; .
EH . partial termination with no restructuring - to scrap the benefit payment card and
vet reduce the programme to POCL automation plus OBCS - would unacceptably reduce
Pathway’'s revenue stream and leave POCL with an infrastructure too highly
iS] specified for its short term needs;
2 ° continuing the programme as currently planned would leave Pathway below break-
even on its investment and POCL with its infrastructure incomplete for a move into
banking and financial services; the introduction of the card for the short period
remaining of the initial contract term would expose customers to disruption if BA
moved to full ACT immediately thereafter,
. a simple extension would delay BA’s move to increased use of ACT, prolonging its
exposure to high unit cost of benefit payments; POCL would have little incentive to
modemise further.
a 3. We took the opportunity, when presenting our emerging findings to the parties, to set out
” Options 1 and 2 as the most likely to provide an agreed way forward. We invited the parties to
ae .fespond indicating whether either might be acceptable. POCL and Pathway supported Option 1, BA
§ preferred Option 2. We offer our assessment of these two options below.
Option 2: Partial Restructuring
4 Under this option, paper based payments would continue until POCL were ready to compete
for ACT payments. BA would go to open market for ACT-fed payments after a lock-in period to
assure income stability for POCL to prepare for the transition. The elements would be:
: no benefit payment card system, but BA continuing its present arrangements with
POCL until it had the capacity (technical and commercial) to compete for ACT
delivery;
° OBCS implemented in key (high fraud) areas;
: automation of POCL infrastructure continues but migrates to support banking and
financial services applications, using smart card technology, with freedom to
compete in new markets;
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. Pathway compensated for reduced scope of contract. g
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5. Advantages of this approach would be:
. POCL would get an automated infrastructure, capable of supporting banking,
financial services, etc
. BA would have an anti-fraud tool (OBCS), and a route to reengineering its payment
processes to ACT;
. the programme would be descoped, with therefore lower implementation risk; and
. Pathway would be well placed to compete for government.direct business.
a)
6. On the other hand its disadvantages would be:
. the perpetuation of a high cost paper-based method of payment until POCL were
ready to compete in the banking market;
. POCL's infrastructure would be too highly specified for its needs, and yet the lack of
an automated payment component would handicap (so it contends) POCL's efforts to
win altemative non-Govemment business;
. delays to BA migration to automated payments and to robust BA accounting and
reconciliation systems (although BA believe OBCS might be adapted to provide the
necessary information);
. lengthy, costly negotiation between the parties, with the strong possibility that
Pathway would be unwilling to de-scope in this way;
. ICL would lose the substantial part of a prestigious project, suffer damage to its
teputation, and could pursue claims for substantial compensation; and
. the failure to capture the full extent of the fraud savings expected from the complete
system, the burden of any compensation payable to Pathway and POCL's inability to
sustain any significant reduction in the payments it receives from BA combine to
make the option uncertain value for money.
Option 1: Full restructuring
7 Under this option, the benefit payment card would go ahead, with card based payments until
POCL were ready to compete for ACT payments. BA would then go to open market for ACT-fed *
payments. The elements would be:
FA
=
° card based payments from the start of national rollout; order books and giros
withdrawn completely by the end of rollout; BA to compete its payment.business
once POCL had the capacity to compete (technically and commercially) for ACT =
delivery; . &
. POCL infrastructure migrates to support banking, financial services and other
applications with smart card, with freedom to compete in new markets; E
. planned BA transfer to full ACT on a schedule beyond the current contract end date, =
to be agreed in negotiation, by which time POCL would have re-engineered its
business to compete electronically and Pathway would have come closer to
recouping its investment;
ore
. card (magnetic strip and potentially smartcard) based and ACT payments coexisting .
throughout. &
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8. Restructuring the programme in this way would have a number of advantages:
. benefits would.be automated, with administrative savings for BA and payment fraud
eliminated:
- benefit recipients would be educated in the use of card-based technologies;
. BA would see a clear route to ACT and an end to POCL's ‘monopoly’;
. POCL would gain an automated infrastructure, with incentives to compete for
business (including from BA) and a platform for social banking, financial and
government.direct applications, but with time to re-engineer its business as
necessary; .
. Pathway would be well placed to compete for new business;
° there would be little likelihood of litigation.
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9 There would, however, be disadvantages and issues to be resolved:
a . BA would have to accept some delay to ACT migration, but this should be similar to
as the delay under Option 2;
& . the residual issues and risks with the programme would have to be resolved urgently;
FA] . the parties would have to satisfy themselves they could pursue this option without
fear of legal challenge.
eae
Weighing the options
10. In both Options 1 and 2:
. the maintenance of an efficient national network of Post Offices is achieved;
. the provision by Government of the necessary commercial freedoms to POCL to
is compete in banking and financial services is a pre-requisite; ‘
3 . the timescale for BA’s move towards ACT-fed payments is similar;
a . there are incentives for POCL to re-engineer its business quickly and in good order;
&
& (but with time to do so); and
. the overall cost to the public purse, while difficult to assess at this stage, should be
& similar.
rer
cin The potential for litigation and programme blight is greater under Option 2. The attitude of
the parties suggests there is the almost certain prospect of litigation, prompted either by BA (on
grounds of breach of contract through delays by Pathway) or by Pathway (on grounds of termination
by BA for convenience through de-scoping the requirement) or by POCL (against BA), or possibly by
the other contractors who were unsuccessful in the initial bidding. In any event, long, acrimonious
and costly legal disputes would be likely, during which progress on any replacement programme
would be blighted.
a 12. Under Option 1, the prospect of serious dispute (though not of difficult negotiations) is
Ee virtually eliminated and the investment already made in time, effort and money on the payment card
is not wasted. There would be no call for compensation by either of the parties and Pathway would
have a reasonable (although not risk free) opportunity to recoup its investment. The contracts
§ between the parties would, however, need to be restructured and certain legal issues resolved.
CA
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13. I Amajor influence in the choice between the two options is the speed of migration to ACT &
payments and the feasibility of enforcing 100% adoption of ACT. Under either approach, migration to
ACT-fed payments will take several years, requiring two systems to co-exist. The benefit payment
card is a more cost effective basis for non-ACT payments than the existing order book system.
Against this, BA argue that, if a move to 100% ACT-fed payments is accepted as an immediate
objective, it would be disorientating and inefficient for benefit recipients to have to familiarise
themselves with the use of a benefit payment card which would be in use for only a short while until
100% ACT became effective. But, unless an element of compulsion is provided, there will be a
continuing need in the medium term for a non-ACT system to provide payment for customers who
are unable to have a bank account or are simply unwilling to do so, preferring payment in cash. So
unless Ministers are prepared to compel BA’s customers to open bank accounts (and to subsidise the
costs of doing so for those customers for whom banks would otherwise be unwilling to provide
banking facilities), Option 1 will represent a more efficient way of providing cash payment facilities in -
the medium term than Option 2. i
14, Option 1 provides a platform for the Govemment to make an early start on its social banking
and electronic access policies, and provides much needed customer education in the use of card
technology. -
15. There are serious risks to POCL’s business under Option 2. The partially restructured
programme should carry less risk of further delay then the continuation of the full programme, since
most of the complexity is associated with the payment card system. However, the absence of an
automated payment system could leave POCL exposed commercially both in maintaining existing
clients and in attracting new clients from the banking and financial services sector. It will be in the
interests of POCL and Pathway to de-risk the continuation of the full programme under Option1. -
Financial Implications
16. _ Both restructuring options would require the preparation of new business cases and realistic”
programmes. The financial terms of any restructuring should recognise:
. BA's need to establish a fixed timescale for the progressive introduction of ACT
payments; :
. POCL’s inability to sustain a significant reduction in payments from BA until it isin a ,
Position to compete with other banking service providers for delivery of ACT- fed u
payment services to BA customers; and
. ICL's concem to secure a reasonable retum (though not a guarantee, as Pathway b
must share with POCL the risks of diversifying the commercialisation of the system). =
17. The variables would therefore be: £
. the length of the plateau until competition for ACT delivery, and the speed of the ®
transition; +
. the level of POCL's guaranteed income; f
&
° the balance between (i) contract extension to remunerate Pathway's investment, (ji)
the rate of retum fairly allowable to Pathway and (ji) the split of retums from ge
commercialisation of the system between POCL and Pathway; ‘3
. POCL's financial prospects after transition;
. review of the risk profile at completion of national rollout. &
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18. Any restructuring of the programme must be based on a realistic reappraisal of dates for the
start and completion of national rollout. As noted above, we believe a delay of up to 9 months on the
present scheduled date for the start of national rollout is likely. We understand that, for contractual
reasons, the parties may not be prepared formally to acknowledge the likelihood of further delay at
present for fear of influencing decisions regarding the future of the programme. But it would be a
serious mistake to embark on a restructuring process without an end-to-end programme for the
. commissioning of the entire system, agreed by all parties. At the same time the restructuring plan
must allocate the costs of further delay between the parties and establish fresh incentives to motivate
each to seek to minimise any further slippage and achieve the earliest practicable completion dates.
aa aa
19. It would be for the parties in negotiation to agree the details. The way forward should seek to
reconcile key business drivers of all stakeholders. Factors in the decision would be which option best
met the priorities of the Post Office review and promoted the social benefits of the network, and how
much strategic factors weighed in a value for money assessment.
20, We suggest that, as a basis for a decision between Option 1 and Option 2, the parties should
address the detailed cost implications of each, and which option will allow POCL to compete most
effectively and expeditiously for ACT-fed benefit payments in competition with other banking service
Fes
providers.
&
8 Conclusion
fa 21. Option 2 (partial restructuring) is, in our view, attractive only in relation to the lower risks it
i) might carry by comparison with Option 1. It has the major disadvantage of resulting almost certainly-
in prolonged contractual dispute, possibly leaving POCL without any automated network until the
legal position is resolved and a fresh procurement completed.
22. Option 1 (full restructuring) may offer the prospect of better value for money in the longer
term although, to achieve this, the programme will need to be driven much harder and more
professionally than so far. This will entail a major change in the status of POCL and a major shift in
bod its management and customer service culture from monopoly supplier to an efficient competitor in an
open market for banking and financial services.
23. The parties have not agreed on either option as a way forward.
Implementation of a restructuring
24, If Ministers decide to adopt either option, we would like to see a neutral ‘troubleshooter’,
ray directly responsible to Ministers and with their full confidence, appointed to ensure the parties give
Ls their full commitment to the implementation process and that the rollout is completed at the earliest
S agreed date. The first priority would be a restructuring plan, agreed with the parties, containing:
g . an action plan to remedy the risks and deficiencies identified in this report; with
Bad . incentives for prompt delivery and wider commercialisation of the programme; and .
s . open book resolution of outstanding commercial issues.
Be -
Ba 25. The troubleshooter would have a challenging role. For any restructuring to succeed, it will be
necessary for all parties to bury their differences and to build a new commitment to see the
Fa programme to a successful conclusion, The troubleshooter’s contribution would be essential in setting
x the tone for the continuing relationships between the parties. The troubleshooter could have a longer
term role if Ministers wanted some external monitoring of progress against the agreed plan.
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26. Adoption of the programme as a platform for the development of banking and financial
services applications will require POCL, as it recognises, to effect a major cultural and organisational
change to prepare itself to compete in-the wider commercial world. The Post Office Review being
conducted by the DTI should consider what refinements to POCL's present status and management
Structure would be desirable to allow it to implement the changes required.
Po
a
Contractual/legal issues.
27. Early indications are that Option 1 would run fewer risks of challenge under the EC
procurement directives, by the Commission or by other bidders, than Option 2. However the parties
will need to assess this question in light of the details of the original competition.
28. Either of the options will lead to modification of the programme contracts. In our view, %
although the scale of the work involved will be substantial, the opportunity should be taken to Foot
_ festructure the contractual relationships to:
. establish POCL as the clear owner of the programme;
. Clarify its status as a ‘supplier to BA; and
. feflect the tighter programme management arrangements suggested in this report."*
RRR
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ANNEX B - THE INDEPENDENT PANEL’S RULES OF PROCEDURE
7. Introduction
1.1° Difficulties have arisen with the project to automate payment of social security benefits
across Post Office Counters, for which the Benefits Agency (BA) and Post Office Counters
Limited (POCL) have contracts (the “Contracts")with ICL Pathway (ICL). BA, POCL and ICL
are referred to collectively in these rules as “the Parties”. In order to inform decision-making
in relation to these difficulties it has been decided to prepare an urgent assessment of
whether the project is technically viable, and if so how quickly it can be completed and at
what cost. -
1.2 To ensure that this assessment is based on a thorough and impartial review it is proposed to
establish a panel chaired by the head of the Treasury Task Force on Private Finance, Adrian
Montague. The Treasury Taskforce was set up as a result of the recommendations of the
Bates Report on the Private Finance Initiative (PFI). One of its functions is to assist in PFI
projects facing difficulties. Its responsibilities include monitoring PFI projects to ensure
progress is being made in accordance with agreed timetables.
1.3. The Parties have agreed with the Panel and each other to participate in the proceedings of
the Panel in accordance with these rules (the “Proceedings’).
Terms of reference
1.4 The Panel's terms of reference will be to conduct the Proceedings (which will be without
prejudice to the Parties’ legal rights) with the intention of preparing a confidential report to consider:
- whether the project can deliver a fully functioning system which meets the project
specification, and integrates fully with BA computer systems; this will include
examination of BA's and POCL’s systems and arrangements for roll out;
- whether the timetable for completing the systems development, and starting and
completing rollout, is deliverable; and whether the necessary managerial and
organisational structures are in place;
- the likely costs of delivery, under current contract dates and with extension;
- in each of these areas, the risks associated with these assessments, and whether °
robust monitoring arrangements and disciplines are in place.
1.5 The focus of the Panel's review will therefore be on the deliverability of the currently defined
project, and the risks associated with estimates of timescale and costs. It is not concermed
with allocating blame for delays experienced so far, or with negotiations as to whom might.
bear any additional costs. .
Practical arrangements
1.6 The composition of the Panel is:
Adrian Montague - Chairman
Alec Wylie
Bill Robins ~ j
The Treasury may, at its discretion, make changes in the composition of the Panel.
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1.8
1.9
8.
24
2.2
2.3
2.4
2.5
The Panel will be assisted by a Secretariat provided by the Treasury.
The Treasury has appointed PA Consulting to act as Consultants to the Panel. .
The addresses, phone and fax numbers and email addresses for HM Treasury, the
Secretariat, BA, POCL and ICL are as set out in the attached Schedule 1.
Meetings between the Panel and the Parties will take place at HM Treasury unless otherwise
specified by the Panel.
The members of the Panel (other than the Chairman) and the Consultants will be retained
and paid by CCTA. The other costs of the Panel will be met by HM Treasury. Each of the
Parties will bear their own costs.
The Panel may terminate the Proceedings at any time if it considers that there is no useful
purpose to be served in continuing.
Procedure and Timetable
The procedure is set out below. A timetable illustrating the possible stages of the
Proceedings is set out in Schedule 2. The procedure and timing of the stages may be varied
by the Panel as it thinks fit subject to the points about timetable in 2.6.
The Parties are invited to submit to the Panel and to exchange with each other by the date
set out in paragraph 2 of Schedule 2 a document not exceeding 10 typed A4 pages setting
out:
2.2.1. a summary of their view of any issues they believe to be outstanding arising out of
the issues referred to in the Panel's terms of reference, including amounts at issue;
2.2.2 the proposed resolution of these issues; and ‘
2.2.3 a list of any documents which have an important and direct bearing on the issues
outlined in the summary.
The first full meeting of the Panel will be attended by all the Parties and the Consultants. The
Parties will not be legally represented (either by extemal or employed lawyers) at this
meeting or at any subsequent meetings. At the first meeting the Panel will invite the Parties
to make short presentations to the Panel about the outstanding issues and how those issues
can be resolved. The Panel will, in its absolute discretion, determine the order in which the
Presentations are to be given, the number of presentations and the time limits for the
presentations,
Following the first meeting the Panel will establish a list of issues to be investigated. It will
invite further submissions from the Parties and will instruct the Consultants to investigate the
matters in dispute. The Consultants will ask the Parties,to provide any information the
Consultants think could be useful to the investigation. The Parties shall at all times give such I
assistance as may reasonably be requested by the Consultants to enable the investigation to
be completed. The Consultants will report to the Panel any failure by any of the Parties to co-
operate in the investigation and the Panel will be free to draw adverse inferences from that
failure.
The Chairman of the Panel may deal with procedural questions without consulting the other
two members of the Panel where he is unable to contact them and an urgent decision is
required. In all other matters decisions will be made either unanimously or by majority vote,
Reale
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at the Chairman's discretion. Where there is no clear majority, the Chairman's decision
prevails.
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26 The second full meeting of the Panel will be attended by all the Parties and the Consultants.
At the second full meeting between the Panel and the Parties, the Panel will invite the
Parties, on the same basis as in 2.3 above, to respond briefly to the Panel's draft findings.
Following the second meeting with the Parties, the Panel will finalise the findings and submit
is) its report to the interdepartmental working group. A strict time limit of two months from the
FI date of the Panel's initial letter to the Parties is set for the Panel to submit its final report. The
Panel will actively seek ways of shortening this timetable.
eas
& 27 The Panel may convene further meetings with the Parties, together or separately, as it thinks
3 fit. The Panel will fix the date, time and place of those meetings.
R 2.8 No member of the Panel, or the Consultants, shall be liable to the Parties (or any of them) for
ig + any act or omission whatsoever in connection with the Proceedings, nor shall they be under
any obligation to make any statement to any person about the Proceedings, nor shall any
Party seek to make them a witness in any legal proceedings arising out of or in connection
with the contracts.
2.9 The Proceedings are private, confidential, privileged and informal. All materials, documents
or submissions, whether in writing or oral, made or created for the puipose of the
Proceedings by the Panel, the Consultants or the Parties (the “Materials") shall be
confidential and without prejudice to the Parties' legal rights. The Materials shall not be
subject to disclosure to or discovery by any Party in any legal proceedings arising out of or in
connection with the Contracts or otherwise without the consent of the other Parties.
2)
2.10 — The report of the Panel shall not be subject to disclosure to or discovery by any Party in any
legal proceedings arising out of or in connection with the Contracts or otherwise without the
consent of the other Parties. ICL will not be shown those parts that deal with BA's and
POCL's performance. The chairman of the Panel will debrief the Parties on the Panel's
findings once the Panel's report is complete but will not comment on or disclose to ICL the
parts relating to BA’s and POCL's performance.
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5 ANNEX D - OUTSTANDING ISSUES
= The following table lists issues to be resolved and, for each one, an assessment of its classification -
strategic (S), critical path (C) or operational (O) - and the party with lead responsibility for resolving it.
I .
Classification I Responsibility
eI Issue {S, C or O) for resolution
3 1. Requirements
3 Finalisation of NR2+ contents description Cc HPO
E Resolution of outstanding A2As Cc HPO
Robust service management organisation s POCL
Ets Security requirement taken seriously c Pathway
oa Interface management c HPO
By “Position of non-economic offices ° Pathway
a Il, Performance and viability
a Consistent and complete technical design c Pathway
g Baselined plan for delivery of contracted Cc HPO
functionality
iB Issues with EPOSS °° POCL
a Issues with reference data c POCL
NR2 limited to 4000 outlets c HPO
Large scale FAD code changes c POCL
. Scaleable design c Pathway
2 : Future proof design s Pathway
Service management products available and c Pathway
“3 scaleable
3 Ric validation - are lessons being captured? oO HPO
NR2 acceptance for live trial by Jan 99 Cc. HPO
Card rollout and production c Pathway , BA
CAPS performance c BA
Management of Pathway subcontractors c Pathway
Ill. Timescale
Reasons for previous (and future?) slippage ° HPO
300 beat rate s HPO
Change control processes c HPO
3 Oct-Dec 98 contingency fe) HPO
= Sufficiency of 11 weeks for live trial c HPO
4 Speed of acceptance process Cc HPO
a8
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