UKGI00008715
UKGI00008715
UK Government Department for
usiness, Energy
Investments & Industrial Strategy
Date: XX'December 2018
Director General: Mark Russell
Lead Official: Alex Cole / Tot
Lead Official Telephone: :
Recipient To Note / Comment To Approve / Decide
BEIS Finance Xx
Gavin Lambert x
OFFICIAL SENSITIVE
POST OFFICE INVESTMENT FUNDING FOR Q3 2018/19
Summary
1. This submission recommends the release of £59.5m of funding to Post Office Limited (
“POL”) for Q3 2018/19 to support its investment spending.
2. POL conducted a reforecast of planned investment spending in advance of the request
for Q3 funding. This showed that they were forecast to spend £84.3m more than the
£459.3m in the 3-year Strategic Plan. UKGI requested that POL initiate the following to
provide us with sufficient comfort to release funding for Q3:
Deep-dive of excess spending in Q2, including rationale for management
overlay on the Q2 forecast
An outline of how and when its reprioritisation process would take place
Internal audit to be tasked with providing assurance regarding POL’s controls
over its capital expenditure spend monitoring and forecasts
Improvement in change spend reporting
3. UKGl is satisfied that these conditions are being fulfilled although much of the work has
yet to be produced. In the meantime, UKGI recommends the release of £59.5m of
investment funding for Q3. This will leave £23.5m for Q4.
Timing
4. Early December 2018. POL have stressed the importance of receiving the funding
before the Christmas period, when cashflow comes under the largest pressure.
Recommendation
5. That you approve POL’s drawdown of £59.5m from BEIS for investment funding for Q3
2018/19.
Background
6. POL secured a £370m funding agreement with BEIS in December 2017 (£210m
investment funding, £160m network subsidy), covering the period 1 April 2018 to 31
March 2021. Of the £210m investment funding, up to £168m is available in 2018/19 and
the remaining £42m in 2019/20, with flexibility to defer funding from 2018/19 to 2019/20
if necessary and subject to need.
UKGI00008715
UKGI00008715
UK Government Department for
Investments Business, Energy
& Industrial Strategy
7. The funding agreement requires POL to produce a quarterly report on
its investment spending to act as a stocktake on current projects and estimate the
funding that it will require from BEIS in subsequent quarters.
8. POL’s Q3 report states the intention to draw £59.5m for investment funding, to add to
the £35m and £50m provided by BEIS in Q1 and Q2 respectively - more detail can be
found in Annex B. A drawdown of £59.5m in Q3 would take POL’s total drawdowns for
the year to date to £144.5m, out of the maximum £168m available in 2018/19.
9. POL has spent £122.5m in 2018/19 to date. Overall this is in-line with the total forecast
£122.6m spending for Q1 (£65m) and Q2 (£57.6m), but there are discrepancies within
each quarter between these forecasts and actual spend (£42.7m in Q1 and £79.8m in
Q2). This was due to delays in projects beginning in Q1 and then a certain level of
catch-up in Q2. It raises questions about the forecasting at POL and UKGI is therefore
working with POL on a number of measures to improve this — see paragraphs 20-22.
10. One project — Back Office Transformation — is currently projected to cost approximately
£17.3m more than originally forecast over its lifetime. This is a critical project to
modernise POL’s internal IT and accounting systems and UKGI advises against
withholding additional resources on this basis.
11. POL’s revised 6+6 forecast for 2018/19 operating profit is £51m which would represent
a significant £16m (46%) growth on 2017/18’s £35m. POL is £7.9m ahead of budget
after P7 and on track to achieve that £51m for the full year. To deliver this and to
undertake critical infrastructure upgrades (mostly in IT), POL forecast that it will invest
£255m in 2018/19. This is in line with the 3-year strategy approved by BEIS and UKGI
in December 2017.
Q2 Investment Summary:
12.POL took a Q2 drawdown of £50m of BEIS funding in October 2018 to spend on
projects agreed in the 3-year strategy. This was added to a £7.6m of surplus from Q1 to
form its total projected investment spend for Q2 of £57.6m which was to be incurred on
the following project categories:
- Simplify the retailer proposition (£24.9m)
- Build innovative, flexible and secure IT (£14.1m)
- Modernise products and services (£8.0m)
- Digitise and optimise the business (£2.1m)
- Modernise skills, culture, HR policies and processes (£3.7m)
- Regulatory and group litigation (£4.0m)
- Other small projects (0.9m)
13. However, POL actually incurred £79.8m of capital expenditure in Q2, as a number of
projects caught up on Q1 delays, particularly in IT. We have subsequently discovered
that overall spending was in line with the sum of forecasts from individual projects.
However, the forecast was deliberately reduced as ‘managerial overlay’ by c.£23m by
the CFOO due to historic over-estimation in forecasts. UKGI has been clear that (i)
forecasting should be reviewed/improved; (ii) in future, any deviations from forecast
should be transparent and justified. UKGI has been shown the supporting files behind
the forecasting process from the POL team during a deep-dive and has been assured
that this will improve in future. A further breakdown of actual Q2 spend is in Annex A.
UKGI00008715
UKGI00008715
UK Government Department for
Business, Energy
Investments & Industrial Strategy
Planned Q2 spend £57.6m
Actual Q2 spend (see Annex A) £79.8m
Variance £22.2m
14. Correspondence with POL shows that this £22.2m overspend is primarily due to £9.2m
more than planned on IT projects, such as cloud enablement and branch technology
refreshers, as well as £3.4m extra on litigation and £2.6m on back office transformation
within Q2.
Benefits Realised:
15.POL budgeted for expected benefits of £40.2m in 2018/19 to be derived from its
investment projects. At the end of Q2, the realised benefits year to date (YTD)
amounted to £16.9m compared to a budgeted £15.7m.
16. However, POL is now less confident that budgeted benefits will be fully captured in
2018/19 and have therefore reduced the forecast to £38.9m. This is primarily due to a
£1.7m decrease in Post Office Insurance projects, a decrease of £0.9m in the expected
benefits from the Solar Full project, a decrease of £0.9m in Cloud Enablement and a
decrease in £0.6m from the Travel App. These are all as a result of delays in the
projects. These are partly offset by a £2.0m expected gain compared to budget for
Project Galaxy (Homephone and Broadband changes) as fewer customers are taking
up the free broadband offer.
Project Category YTD Actual 2018/19 Expected
Benefits Benefits
Simplifying the retailer proposition £6.5m £12.0m
Build innovative, flexible and secure IT £1.2m £6.1m
Modernise products and services £7.5m £16.9m
Digitise and optimise the business £1.8m £3.5m
Modernise skills, culture, HR policies £0.0m £0.4m
and processes
Total Actual Benefits £16.9m £38.9m
Forecast at the start of 2018/19 £15.7m £40.2m
Variance £1.2m (£1.3m)
Investment Plan for Q3:
17.UKGI has reviewed the planned investments for Q3 (i.e. between October and
December 2018), forecast by POL to be £59.5m. This is expected to be distributed as
follows:
- Simplify the retailer proposition - £14.0m
- Build innovative, flexible and secure IT - £11.6m
- Modernise products and services - £16.0m
- Digitise and optimise the business - £7.2m
- Modernise skills, culture, HR policies and processes - £6.0m
- Regulatory and group litigation - £4.7m
UKGI00008715
UKGI00008715
UK Government Department for
Investments Business, Energy
& Industrial Strategy
18. The key projects to be delivered as part of Q3 spending are:
e The continuation of the DMB franchising programme, which has been increased
from 177 branches to 227;
Project Everest (cloud enablement);
Travel App upgrades;
The last phase of back office IT transformation; and
Insurance system migration.
19. Across the whole of 2018/19, POL now expects to spend £273.8m on projects
compared to £255m in the strategic plan. Over the 3-year period, POL expects to spend
£543.6m, compared to £459.3m in the strategic plan. The £18.8m difference in 2018/19
and £84.3m over the 3-year plan are classified between the following categories:
* Overspend
+ Scope change
e New projects - £11.4m
20. The £84.3m will be “reprioritised” — i.e. some projects will be cancelled, some projects
will be scaled back and the spending on some projects will be pushed out to later years.
This process is taking place at the Investment Committee level which involves a number
of members of senior management. We expect this process to be completed by the Q4
funding request to be received in January 2019. UKGI has been working closely with
POL to ensure that this is done effectively.
21. UKGI has given POL a number of conditions that need to be in place in order to receive
the funding for Q3. The first of these is the progress on the reprioritisation outlined in
paragraph 20. Secondly, POL were asked to engage in a deep-dive on forecasting with
UKGI, mentioned in paragraph 13. Thirdly, UKGI has agreed a scope of work with
POL’s internal audit function which will deliver a report on the change spend procedures
in place. This will include monitoring of spend so far and future forecasting and aims to
provide recommendations that allow POL to better track the spend and timing on its
investment projects to avoid repeats of the reprioritisation process. This report is
expected to be presented to the January 2019 Audit and Risk Committee. Finally, UKGI
and POL have begun working together on the long-term reporting procedure as we
move deeper into the 3-year plan.
22. UKGI will continue to work closely with POL to monitor the ongoing delivery of the
projects and to challenge them to improve their financial management processes. With
this in mind, UKGI recommends that the £59.5m funding request for Q3 is approved.
Media Handling
23. UKGI does not consider there to be a need for specific communications action
regarding this funding drawdown. The funding that this relates to was announced in
December 2017.
Contributors
24. This note contains financial considerations, as agreed with Richard Beckett of BEIS
Finance.
UKGI00008715
UKGI00008715
UK Government Department for
Investments Business, Energy
& Industrial Strategy
25. This note is not considered to raise legal issues and Legal has not
been consulted.
26. This advice does not have parliamentary handling implications.
Annexes
A. Q2 project level spend analysis (£m)
B. Summary Table of Investment Plans and Funding Drawdown
ae
UK Government
Investments
Annex A - Q2 project level spend analysis (£m)
Variance
ém Q2 Plan OR Actua I ci runded
Further franchising DMBs incl. old Crown project 17.0 169 (0.1)
Network Expansion 34 34 o4
Solar Full (HNGT) 19 19 0.0
Self Service Kiosk Rollout 03 4a 08
Agents / Postmasters Portal os o4 (0.4)
Other Smaller Projects on 0.9 0.8
[Simplifying the retailer proposition 23.0 243 13
Mails Projects - O14 O4
PO Insurance Investments 33 5.0 uy
Identity Services Investments 7 04 (1.3)
Project Galaxy 00 (0.1) (0.1)
Falcon - Travel Hub 10 28 a7
Telephony Routers 03 06 04
Project Panther (integration costs only) - 08 08
Falcon - Peregrine negotiations and implementati 06 06 (0.1)
Digital Developments 03 07 04
Eagle 00 os os
Other Smaller Projects (0.0) os 0.5
IModernise our products and services 72 11.9 47
Project Everest - Cloud Enablement 04 37 33
Risk and Resilience 14 40 26
EUC Branch Deployment 39 73 33
End-of-Life Replacements 20 19 (0.1)
Branch Printer Replacement 20 20 4
Project Nelson 10 09 (0.1)
CDP re-procurement 12 14 03
Project Trafalgar 04 08 05
Other Smaller Projects - (0.5) (0.5)
Build innovative IT 12.2 21.4 92
[Enabling supply chain and back office improved 0.0 O41 O41
Property 12 1.0 (0.2)
Project Arrow (Data warehouse/B!) 03 04 O41
Success Factors 14 os (0.9)
Other Smaller Projects 06 1.6 0.9
Digitise and optimise the business 3.6 3.6 0.0
Back Office Systems Transformation 3.7 63 2.6
IModernise our skills, policies and processes 37 6.3 2.6
GoPR 16 1.0 (0.6)
Group Litigation 23 57 34
Other Smaller Projects 02 04 0.2
[Regulatory 44 71 29
TOTAL UKGI Funded 53.9 746 20.7
Non-UKGI Funded (i.e. carry forward) 37 5.2 15
TOTAL Change Spend 57.6 798 222
UKGI00008715
UKGI00008715
a
Department for
Business, Energy
& Industrial Strategy
ae
UK Government
Investments
Annex B - Summary Table of Investment Plans and Funding
Drawdown
UKGI00008715
UKG100008715
bog
Department for
Business, Energy
& Industrial Strategy
Simplify the Retailer £35.3m £10.4m £35.6m £81.3m £157.4m £238.7m
Proposition
Build Innovative, £27.2m £16.0m £12.0m £55.2m £52.7m £107.9m
flexible and secure IT
Modernise our £18.4m £13.7m £18.3m £50.4m £64.6m £115.0m
Products and
Services
Digitise and optimise £4.8m £7.2m £11.2m £23.2m £17.7m £40.9m
the business
Back office system £7.2m £6.0m £6.0m £19.2m £0.8m £20.0m
transformation
Other £9.1m £4.7m £4.6m £18.3m £2.8m £21.1m
Carry forward spend* £20.6m £3.6m £2.1m £26.2m £0.0m £26.2m
Prioritisation review** £(65.4)m £(84.3)m
BEIS Funding £85m £59.5m £23.5m £168m £42m £210m
Drawdown
Cumulative Funding £85m £144.5m £168m £168m £42m £210m
* Carry forward of £26.2m into 2018/19 from prior year (i.e. delayed spend from 2017/18)
** No detail provided by POL yet — UKGI to discuss as part of wider review into the future years
(2019/20 and 2020/21) forecasts