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benefits Benefits Agency and
Post Office Counters Ltd
Third Floor
, (:) Tecmninal House
agency 52 Grosvenor Gardens
tondon SwIW 0A
telephone {
Mr Toay Oppenheim Jacsimils
Forest Road
Feltham 5 December 1995
Middlesex
TW13 7ET
a
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Dear Mr Opperheim
PATHWAY’S FINANCIAL STRUCTURE
I am writing to confirm certain points arising from the
meeting held yesterday on the above subject.
Charterhouse Bank, on behalf of the Programme, have reviewed
Pathway’s financial structure and have raised a number of
serious concerns. These concerns have been registered by the
Programme as a Class A Risk on the Risk Register and are
summarised as follows:
Performance Risk
Pathway’s credibility to be the service provider for the
automation service is dependent on its three
shareholders/subcontractors and other subcontractors.
However, the contracting authorities’ contractual
relationship will be with Pathway only. Therefore, there
would exist a significant risk for the contracting
authorities on the efficacy of the subcontract arrangements
to be put in place by Pathway.
Financial Risk
There are significant risks posed by Pathway’s relatively
high level of: financial gearing and the comprehensive
security package required by Pathway’s banks. They relate
to:
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e the adequacy of the finance for the initial capital
investment;
° the availability of adequate finance later in the contract
life.
Charterhouse highlight that:
©® Pathway’s shareholders will have no commitment to provide
additional equity funding;
® Pathway’s bankers’ commitment to provide additional finance
will be limited in amount and subject to conditions - it
will not be possible to ensure satisfaction of these
conditions in advance;
° the presence of a comprehensive security package will
severely restrict Pathway’s access to finance from other
sources.
Claims Risk on the Service Provider
In the event that the contract with Pathway is terminated by
virtue of a Pathway default and the contracting authorities
seek damages, they will be in the position of an unsecured
ereditor behind the bank’s secured position. Significant
xisk must therefore be associated with the likelihood of
receiving any such damages.
Termination Risk
Pathway strongly favour the contracting authorities assuming
obligations to acquire parts of the automation service that
have been rolled-out and. are operating successfully. These
termination amounts may not reflect the market value of these
assets nor the utility value of the assets to a new operator.
These risks have to be viewed in the context of the issues
described below.
Choice
The contracting authorities will need to satisfy themselves
that potential service providers’ financial structures do not
pose significant risks,
Ce yDATaL PATNA CETTIRS I PAYEIW: DOC
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Benefit Payments Sensitivity
Should the chosen service provider have financial problems
that affect the operation of the benefit payments system
there could be serious consequences for benefit claimants
with obvious repercussions.
POCL’s Commercial Strategy
POCL’s future financial performance will be dependent upon
the satisfactory delivery of the automation service. As such
the long-term financial viability of the service provider is
vital.
PFI
The contracting authorities are not satisfied that Pathway’s
proposal on termination risk complies with the principles of
ransfer of risk embodied in PFI.
Conclusion
At the meeting held yesterday the Programme recommended that
the class A risk associated with Pathway’s financial
structure could best be addressed by the provision of joint
and several guarantees from each of Pathway’s shareholders
for all Pathway’s obligations under the automation contract.
Finally, it was agreed at the meeting that you would respond
to the contents of this letter by Friday, 8 December 1995.
Please submit your response by 5:30 p.m.
_Yours..sincerelw...
PAT KELSEY
Head of BA/POCL Procurement Group
Co \EAPAVPATE\LETTERS\ PIPPI, DOC
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2 DEC "9S 12:43 FROM
BA/POCL Programme * 3rd Floor Terminal House
52 Grosvenor Gardens * LONDON ° SW1W OAB
Telephone :i.. * Facsimil
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benefits
®...:I12:39 pm, Tuesday, 5th December, 1995
EB... @: [4 page(s) in this fax, including this one
From: To: TONY OPPENHEIM
Pat Kelsey — einen
fax:
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