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POB(96) Sth Copy No.
PO96/49 to 54
POST OFFICE BOARD
Minutes of the meeting held on
7 May 1996, at Post Office Headquarters, London
Present
Sir Michael Heron Chairman
Mr R C Close Managing Director Finance
Mr J E Cope Managing Director Strategy and Personnel
Dr D Grieves
Sir Christopher Harding
Mr P J Howarth Managing Director Royal Mail
Mr AJ Roberts Chief Executive
Mr R G Osmond Secretary
Mr S Childes Notes
Also Present
Mr T Brown POCL )
MrR Dykes Managing Director, POCL ) (for item
Mr R Peaple POCL ) PO96/52)
Mr S Sweetman Managing Director designate, POCL )
Apologies PO96/49
The Board noted that Mr Allen was unable to attend
PETER HOWARTH PO96/50
The Board congratulated Peter Howarth on his
imminent retirement and thanked him for his
distinguished service to the Post Office over forty years
and in particular for his contribution to the work of the
Board over the past five years
JE RRY COPE io PO96/51
The Board congratulated Jerry Cope on his
appointment to the Board and welcomed him to his first
meeting
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Sag
INDUSTRIAL RELATIONS
IN ROYAL MAIL
@
(i)
(iii)
(iy)
BA/POCL AUTOMATION
POB(96)33
(i)
(ii)
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PO96/52
The Board noted Mr Roberts’ oral report on the current
state of industrial relations in Royal Mail, the main
points from which were that
intensive discussions with the CWU had continued until
the previous week, including a meeting at General
Secretary/Managing Director level on 1 May. Despite
this, the CWU were now arranging to hold a ballot of
their members on or about 13 May though it was not yet
clear how the ballot question was to be framed;
it was expected that the result would be available on 2
June, during the CWU Annual Conference, and that if a
strike were called this could be expected to begin in the
middle of that month;
a key meeting would be held in Royal Mail on the
following day to discuss the Business’s PR strategy, and
in particular the importance of being able to explain
simply to the press what the Business expected from
“flexibility” and of highlighting the extent of what was
on offer from the Business in terms of job security and
other benefits
noted further that
Mr Roberts would make a fuller report to the Board at
its next regular meeting on 14 May.
PO96/53
The Board recalled its previous discussion (PO95/116)
noted Mr Roberts’ paper and in particular that
following prolonged and intensive work in POCL and
the Benefits Agency, authority was now being sought to
proceed to the contract award stage of the counter
automation project;
the project would involve the automation of all counter
positions in all Post Offices and a new card based benefit
encashment service. There would be important
opportunities for new business as a result of automation,
with clearly identified scope for an increase in volume of
20% by the millennium, most of which would require,
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(iii)
(iv)
(v)
(vi)
(vii)
or be enhanced by, automation;
automation was moreover considered to be important to
POCL’s infrastructure for the future, and would serve to
secure its largest client, the Benefits Agency, thereby
reducing the risk of losing significant levels of business
to ACT;
an eight year contract was proposed, with private sector
financing and involvement envisaged under PFI rules.
The Project Evaluation Board and MaPEC had now
considered in depth bids from three potential suppliers
(coded A, B and C) and had evaluated them against a
base case in which the extension of automation in POCL
would be limited and incremental. The base case
assumptions had been independently reviewed by
Coopers and Lybrand and were considered to be as
robust as possible. An option funded solely by the Post
Office had also been considered, under which
substantially greater risks remained with POCL,
although the Government was not expected to approve a
conventional public sector funding approach;
the evaluation showed that there was a positive return at
12% for all three bidders, ranked B, C and A in
descending order of preference. Independent
commercial lawyers had reviewed the bids to identify
any significant non-compliance with contract
requirements, and had ranked the bids in the order B, A,
C, recommending that C should not be awarded the
contract because of an unacceptable degree of non-
compliance. A was regarded as deficient against several
key requirements. While this was insufficient to rule it
out completely, a considerable price advantage over B
would be required for A to be preferred;
in terms of risk transfer it has been concluded by
Charterhouse that B was close to the degree of risk
transfer sought and that it would secure PFI clearance.
In this regard C appeared to accept some fraud risk, but
other conditions associated with volume quantification
and RPI linkage rendered its risk transfer position less
clear-cut, while A’s tender offered very limited risk
transfer and was not likely to satisfy PFI requirements:
the Joint Steering Committee, which included
representatives from DTI, DSS and the Treasury, and
which was jointly chaired by POCL and BA had
concluded that the bids from A and C were
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unacceptable, and had endorsed the view of the
Programme Evaluation Board that on financial and non-
financial criteria the contract should be awarded to B.
MaPEC’s endorsement was subject to a number of
specific conditions;
noted in discussion that
(viii) _ the project had benefited from a degree of sophisticated
control superior to that generally experienced in the
past, and the work involved in this had been fully
justified by the way in which the final approval stages
had been completed with a considerable level of
confidence;
i
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p
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(ix) the previously reported outstanding commercial
obstacles with BA had been resolved to POCL’s
satisfaction;
(x) there was a degree of technical risk with whatever
system was adopted, not least because of the size of the
proposed network. Extensive internal and external
technical advice had been sought, and it had been
concluded that there were no inherent technical
problems with the system of the preferred supplier. Any
risks arising from the scale of magnitude of the project
were to a considerable extent covered by provisions in
the proposed contract not to make payments to the
supplier until contract parameters were met. The system
envisaged by B had moreover been proven in operation,
albeit on a somewhat smaller scale. Whilst B’s plan to
have a number of sub-centres arguably increased
complexity, it should enable any problems to be
contained within a limited area rather than affecting the
whole network, as with the wholly centralised systems
proposed by A and C;
(xi) _ issues of fraud risk fell into two categories, limit of
liability and categories of risk accepted by tenderers. B.
was the most compliant in this respect and generally met
POCL’s expectations. The potential for fraud would in
any event be significantly reduced under automation,
from the present estimated potential level of £150m to
around £15m. Proposals for sharing risk with BA were
regarded by POCL as acceptable;
(xii) there was real potential for new business under a fully
automated system, for example for banking and savings
services, not excluding the possibility of providing
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(xiii)
(xiv)
(xv)
counter services to one or more of the joint stock banks
as they reduced their own networks. Physical capacity
might in practice prove to be more of a limitation than
any constraints of the automated system;
the major remaining problem was the difficulty which
had arisen in Northern Ireland, where the SSA was
apparently not prepared to pay the same price as that
agreed with BA. Although the amounts involved were
small (£1-2m a year or some £10m over the life of the
contract) the SSA claimed that the Northern Ireland
budget could not accommodate the costs, particularly
given the new strains arising from a security situation
less favourable than foreseen when the Province’s
budget was set. The financial projections for the project
excluded the ‘at risk’ revenue from Northern Ireland.
Nevertheless, the options of either conceding the SSA’s
claim or proceeding without Ulster (initially at least)
were both unattractive, having on the one hand
commercial, and on the other political, implications. The
Chairman had already alerted DTI to the problem and
high level political discussions were understood to be
taking place in an attempt to find a way of relieving the
Northern Ireland budget problem. In the view of the
Board it would be quite unacceptable to make any price
concession to the SSA. It would therefore be important
either for the issue to be resolved before the Secretary of
State for Social Security announced any go-ahead for
the project (which he wished to do on 15 May at the
NFSP Conference) or for any agreement to be subject to
such resolution, whether or not that proviso were made
public. There were mixed views about the desirability of
accepting an arbitrated settlement, not least because DTI
and DSS were thought to be sympathetic to the Post
Office’s position and because this would take the
pressure off any political moves to resolve the problem;
AGREED
that resolution of the Northern Ireland problem should
be remitted to the Chairman, the Chief Executive and the
Managing Director POCL, without whose agreement the
Board would not endorse any announcement of a go-
ahead for the project;
noted
MaPEC approval subject to the conditions set out in
para 16 of the paper and annexed to these minutes,
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(xvi)
(xvii)
(xviti)
proposed total POCL programme expenditure, inclusive
of sunk costs, or £15.8m;
AUTHORISED
devolvement to MaPEC for full authority of future
programme management costs;
POCL to proceed to full contracts with BA and the
successful supplier, subject to satisfactory progress on
the Northern Ireland problem
PO96/54
The Board noted that the next meeting was scheduled
for 14 May 1996.
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