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WITHOUT PREJUDICE
Rt Hon Stephen Byers
Chief Secretary
HM. Treasury
Parliament Street
London SW1
9 December 1998
Your letter of 20 November set a challenging deadline for ICL and the public sector
to arrive at Heads of Agreement. Furthermore, you declared that you were looking
for ICL to make a “speedy and decisive move”. Because I share your impatience to
find a speedy resolution to the outstanding issues, I initiated another round of
contacts with the public sector.
Although we have had some further discussions with the public sector, there have
been no definitive negotiations given the prohibition imposed by Ministers. This has
made it impossible to reach Heads of Agreement. However, in the interests of
resolving the impasse I am prepared to make a “speedy and decisive move”
A major criticism of ICL's proposals of 9 November 1998 appears to have been that
ICL sought (in particular through the contents of its paper on Funding) to transfer
risks back to the public sector. The impression was also created that Fujitsu was in
the process of withdrawing its support from the Pathway project. There was also a
view that the ICL proposals in the Commercial and Contractual paper represented
unacceptable price increases, Our revised offer addresses all these points.
The contents of this letter have been discussed with Fujitsu and the Chairman of the
ICL ple Board Both support my proposal, but I must stress that it should be
regarded as ICL’s best possible offer. I have no hope of persuading my shareholder
or my Board to give me further room to move.
First, ICL, with the support of Fujitsu, is prepared to fund the whole project. This
represents an investment of £600m.
In addition, we have revised and restructured our commercial proposals, The table
below summarises the effect of our revised offer on the public sector payments.
NPV (£M) Corbett ICL Proposal
Keith Todd
I BA 295 299 3 Chief Executive
BES/OBCS 161 182 TK Todd
ICL ple
Other POCL 431 26 Finsbury Square
London EC2A
Total POCL
rgistened in En@jand mo
Registered Othce
28 Finsbury Square
toadon 624 108
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NB
¢ The payments shown on this table exclude the effect of-making payments
quarterly in advance as the difference in timing occurs within the financial year
of the public sector parties.
BES/OBCS are provided by ICL under its contracts with POCL, but are services
for the BA, which are recharged by POCL to BA under a separate agreement
The Benefits Agency payment of £299m is substantially below the £406m
expected to be paid under the Original Contract. The BES/OBCS payment is
broadly equivalent
ICL is also prepared to accept an even higher degree of risk. Under the revised offer,
ICL’s NPV loss has increased to £118m and this figure does not include the
additional risk taken on by ICL as a result of removing the contingency fund (see
below), The table below summarises the impact of the revised offer on ICL. It
shows that ICL’s loss will be £269m (excluding the additional risk) on an investment
of £600m.
(M) Corbett ICL Proposal
NPV Loss 224 -118
P&L (555) (269)
Total funding 600 600
requirement
The other main features of our offer are as follows:-
* The proposal on contingencies is withdrawn. The costs of the programme based
on the agreed project plan are included in the offer with no additional
contingency. This has resulted in a substantial increase in cost and risk to ICL.
ICL is prepared to forego the majority of the price increases sought in its offer of
9" November, in return for the removal of any discount on volumes. This
increases ICL’s risk substantially, since the system will have to deliver high
volumes (well above guaranteed levels) before ICL will receive any material
benefit from the removal of volume discounts.
We confirm that we will accept all fraud risk as envisaged in the original
contract,
We have submitted to your officials the full details of this offer including cashflows.
This offer represents an enormous commitment for ICL and one that can only be
Justified if we have confidence in the contractual arrangements, and the commitment
of Ministers, moving forward. As I have said previously we have had limited
opportunity to discuss the commercial and contractual issues with the public sector.
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We have given your officials papers explaining ICL’s revised proposals for Funding
and Acceptance. The key points for Ministers are the following:=~
1 Funding Paper
Although Fujitsu are now providing the funding, there are still two important
issues to address to support the major investment being made in the project
This first issue is in relation to compensation for termination on Pathway
default, force majeure and corrupt gifts. We are awaiting a response from
the public sector on force majeure and corrupt gifts
In relation to termination on Pathway default the public sector wish to retain
an option to take over the Pathway system. However, ICL considers that,
even in the event of Pathway’s default, where the system has value, the
public sector should be obliged to take over the system and make a value
based payment (less, of course, any allowable set-offs as previously agreed)
in return for the use of the system.
The second issue is that the Related Agreements should be clarified to ensure
that Pathway should be compensated (through the existing Change Control
Procedure provided for in the Related Agreements) for any increased costs or
lost revenue arising from changes or slippage to the programme or changes
to the system for which the Authorities are responsible.
Acceptance
Following detailed discussions, progress has been made on Acceptance. The
parties have agreed that Acceptance will be completed prior to the start of
National Roll-Out and is not linked to NR2+
ICL considers that the relevant guarantees on volumes of transactions should
be triggered at the start of National Roll-Out. This has been accepted by
POCL, for its part, but not by BA.
There is agreement that an Independent Expert will be appointed to assist in
the rapid resolution of acceptance disputes.
An issue remains about the exact powers of the Expert. ICL considers that
the Expert should be empowered to make decisions which are binding on the
parties, and should be implemented at once to avoid programme delay. Any
party who did not wish to accept the decision should be able to reopen it
subsequently through resort to arbitration, legal proceedings or subsequent
agreement. This is already common practice in traditional complex
infrastructure projects — such as major transport infrastructure projects — but
it would also be appropriate for this project, given its complexity.
So far as the identity of the Expert is concerned, ICL recommends that Peter
Copping of PA Consulting Group is appointed as Expert, because of his
existing involvement with and knowledge of the project. If this proves
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unacceptable then an expert from outside the UK (to ensure
impartiality) should be selected by mutual agreement of ICL and the
Authorities
Finally, an i remains in relation to the number of allowable
incidents at Acceptance. ICL asks that this is resolvable through a
technical working group, but considers that the Expert, acting with the
persons described above, resolve any disputes.
As you can see, I have made the "speedy and decisive move". I have done
so to demonstrate ICL's (and Fujitsu's) total commitment to this project,
The Horizon project is tecnologically viable and politically desirable.
Coupled with the heads of agreement for a public/private partnership signed
with the Post Office, which the Post Office assure me they are anxious to
pursue vigorously, I believe that the project will deliver for POCL the new
future promised by its increased commercial freedoms just announced in
Parliament. It is in the inter of all parties to move swiftly and
decisively as has already been done by ICL. I hope that Ministers will now
feel able to authorise the public sector to finalise the details around this
proposal, so that definitive agreements can be quickly executed and the
project can proceed to a satisfactory conclusion.
look forward to hearing from you.
Yours faithfully,
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KEITH TODD——__