The Economics of Network Transformation

The Economics of Network Transformation

The Post Office was meant to report back to the government how they actually accounted for the £1.34b.  I am getting the distinct impression that this unaccountable, incompetent organization is going to avoid doing this in the hope that no one will investigate it further.   Contemptible arrogance on their part.

Well let me start by looking at what was asked for, what they said they would do with it and what it ended up looking like.  Just bear in mind though that I am not an accountant and it is difficult to make head or tail out of what POL report.   Obfuscation is the name of the game for them.

So we start off in 2010 with the ‘Securing the Post Office Network in the Digital Age’ document.   This gives us probably as much detail as POL and BIS ever got round to transcribing from the original Fag Packet they wrote their calculations on.

We all know I think that the original total figure required was £1.335 billion.

This was allocated as follows:

By Year:

2011/12 £180m (Subsidy £180m Actual) (Actual Grant £0)

2012/13 £410m (Subsidy £210m Actual) (Actual Grant £98m)

2013/14 £415m (Subsidy £200m Actual) (Actual Grant £317m)

2014/15 £330m (Subsidy £160m Actual) (Actual Grant  £170m)

NB: The Actual Grant is what was recorded as expenditure during the course of the year – in reality POL received on 1st April of each financial year the amount allocated.  Unspent portions were accrued into the following year.

By Expenditure:

Subsidy                                                £640m

Modernisation                  £494m

Technology                         £94m

Project Cost                       £67m

Other                                    £40m

NB: The actual Subsidy Payments received seem to add up to rather more than was originally intended £750m as opposed to £640m – as always no explanation why the difference but the EU did approve the £750m figure.

So what I will do here is to subtract the £750m from the £1.335b which leaves £585m and then allocate that based on the percentages in the Digital Age Document to arrive at these corrected figures:

By Expenditure:

Subsidy                                                £750m

Modernisation                  £416m

Technology                         £79m

Project Cost                       £56m

Other                                    £34m

And to this amount received from the government for investment into the network you have to add the £188m POL earned as Profit from Continuing Operations over the 4 years.  I see no note that they returned any amount to the Shareholder Executive.   This has disappeared into the retained earnings cavern which at the start of this fiasco stood at a massive £552m loss.

Actual Expenditure

POL very kindly give us a break down of the grant expenditure

2013 2014 2015 Total
Capital Expenditure 66 94 59 219
NT SPMR Compensation 12 88 43 143
NT and IT Programme Costs 20 135 68 223
98 317 170 585

Somewhat amazingly the £585m I calculated ties in with these figures!  It is unfortunate though that POL didn’t see fit to break it down into the categories that were originally proposed but never the less we can start to see where it all went.

So here is what the Government wanted:

  1. The funding will enable Post Office Ltd to do much more than simply maintain the status quo. By the end of this Parliament, we have asked Post Office Ltd to have: • About 4,000 Main Post Offices in town and city centres across the country – this alone is a larger network than that of Tesco; • Converted about 2,000 sub post offices to the new ‘Post Office Local’ model, ensuring the longer opening hours demanded by mail and bill payment customers; • Expanded online and introduced a range of IT improvements to make transactions quicker and simpler; and • Eradicated the losses made by its directly managed Crown post office network.

And this is what they achieved:

  1. Instead of 4000 Main Post Offices they only managed to convert 2384 – a success rate of less than 60% and considerably LESS than the 3,370 stores operated by Tesco in the UK
  2. Instead of 2000 Locals then only managed to convert 1734 – a slightly better success rate of 87%
  3. It is of course a subjective and personal opinion but there have been no improvements to the Horizon Online System during the course of the project that could be described as making transactions quicker and simpler. I cannot judge how their online presence is doing but strangely that is down to them not releasing any figures to support this – I wonder why?
  4. They haven’t eradicated the losses at the Crown Branches. They have tried to sell some of the loss making branches but haven’t even been successful in achieving this either.  They do tell us that the losses are dropping but this is incredible – very hard to believe – crown branches suffer the same problems as the rest of the network – falling sales and higher rents.   But not only that, they have a real union looking after their members and subsequently the employees in these branches actually earn a decent wage – unlike SPMRs and the new operators.

But the best indicator that they underperformed with Crown Office Loss reduction is the remuneration committee elected not to award any performance related bonus to Ms Vennells for her Crown Profit Loss target during the year as it was ‘below target’.

Some might summarise the overall performance as an extremely poor result given the amount of money they have been provided with.  Some others might disagree.  Say for instance the remuneration committee of the Board of Directors.  While they decided to state that the Crown Office target was not met, they still awarded Ms Vennels 100% of her performance related bonus in respect of Modernisation targets.   It certainly beats me how much more she would have to underperform to lose any of this.

Then of course there is the fact that £1.35b was not enough.  Now a further £640m is required to take the project through to conclusion.    I really think that says it all.

The Economic Return on Investment

This project was meant to result in POL requiring less of a subsidy from the Government.    Well that is not yet reflected in their accounts.    The only cost saving that could result from this network transformation would have been from payment to Operators/SPMRS.    In 2012 these were £483m.  In 2015 they were down to £435m.   Some of this no doubt is down to NT but there has also been a significant decline in POL turnover in the same years which would affect SPMRs pay.   Loss of valuable contracts such as NS&I and DVLA, as well as reductions in certain transaction related pay items would have affected this £48m drop much more than NT.

Summary

Do we need one – this is a financial disaster – yet the government in their wisdom is giving them more to do the same.   £2 billion pounds to destroy the brand and the reputation of the business but far more importantly the many millions of pounds wiped of the value of the subpostmaster’s own assets – all for nothing.

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One thought on “The Economics of Network Transformation

  1. I am not an accountant either, but I smell a rat.

    From the outset, those converting to Mains were offered UP TO £50,000 capital contribution, and Locals UP TO £10,000. In our own case, (and I am sure many others) that £10,000 was more like £1-2000.

    Even allowing for the absolute maximum:

    2384 Mains x £50,000 = £119m

    1734 Locals x £10,000 = £17m

    By my reckoning, that comes to £136m, a mere £83m less than the £219m in the accounts.

    Given that the program and IT costs are greater than the Capital, and there has been 0 obvious IT investment, it’s reasonable to assume that any automated kit comes under this heading rather than capital.

    Either every Crown now has gold counters, or theres a lot of money being put to dubious uses

    Like

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