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Ref...
To: ci: Mr Scholar
SECRETARY OF STATE
MR MCCARTNEY CGBPS
From:
DAVID SIBBICK CGBPS 1
DIRECTOR POSTS Cil
iGRO I CGBPS 1
151 Buckingham Palace Road Anderson CGBPS1
Tel: f~ GRO Corry SpAdv
30 July 1998 Mo wll
/ GR
POST OFFICE COUNTERS/BENEFITS AGENCY AUTOMATION
PROJECT "HORIZON".
Issue
You are to meet with the Secretary of State for Social Services and the Chief
Secretary this evening to discuss the way forward on the BA/POCL counters
automation project, code named “Horizon”.
Recommendation
2. That you note the background to this project, and are guided by the
suggested “lines to take” which follow.
Timi
EB URGENT: the meeting is at 5.00 pm today.
Background
4. In 1993, in a bid to cut the costs of delivering social security benefits, DSS
came forward with a proposal to require benefit recipients to accept payments by
automated credit transfer into bank accounts (ACT). Because income from the
Benefits Agency (BA) represents more than one-third of Post Office Counters Ltd
(POCL)’s income, the DSS proposal would have led to a massive collapse of the
nationwide network of post offices. There were also other problems with the
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proposal, such as how and at what cost the sizeable rump of “unbankable”
recipients would be dealt with. The proposal leaked, and a major public campaign,
led by the National Federation of Subpostmasters, caused the Government to give
assurances that benefit recipients would continue to have the option of draw their
benefits at post offices.
5. Out of this grew the Horizon project. It gives the Benefits Agency a
modern, fraud resistant means of paying social security benefits, with a magnetic
strip plastic swipe card replacing the traditional payment books and girocheques;
and it gives POCL an automated platform, with on-line terminals at 40,000 counter
positions in more than 19,000 post offices, to retain existing clients and to develop
new business opportunities, as well as to modernise its own processes. This £1
billion project was undertaken under the Private Finance Initiative, with ICL
Pathway as the private sector partner.
6. The project, one of the largest and most complex iT projects ever, is now
running some 2 years behind schedule. Under pressure from DSS Ministers,
concerned at the fraud savings foregone, the Government earlier this year asked
DTI and DSS officials under Treasury leadership to review the project. The
Horizon Working Group in turn commissioned an Expert Panel, under the
chairmanship of Adrian Montague, to report on the project’s technical viability.
7. The resulting report was put to Ministers on 22 July. It concluded that the
project was technically viable, and likely to be both robust and acceptably “future
proof”. It suggested that there might be some nine months further delay to the
project It suggested 3 main families of options: first to continue with the project
provided satisfactory terms can be negotiated with ICL (probably the most we can
offer ICL within EU procurement law is to extend the payback period by two
years); second to continue with the Horizon infrastructure but without the payment
card; and third to cancel the project. Under all three options, which are set out in
more detail at Annex B, POCL would develop “front end” banking facilities to
enable account holders of some or all of the commercial banks to access their
accounts for basic transactions at post offices. This facility would use either the
Horizon infrastructure or alternative technology depending on the option.
8. Immediately after receiving the report, Frank Field wrote to Geoffrey
Robinson on 22 July (copy at Annex A) reinforcing the DSS stance on the future
of the project. This favours option 2, namely cancelling the benefit payment
card but continuing with the remainder of the Horizon infrastructure to allow
an earlier move to ACT, whilst parallel provision of “front end” banking services
in post offices would be established. BA would aim to migrate to ACT over three
years from October 2001. POCL would therefore need to establish banking
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facilities by that date. A summary of this option (Option 2) and Options 1 and 3 is
attached at Annex B.
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Argument
9. We have three major concerns with Option 2:
e we do not think ICL will agree to continue with Horizon less the payment card
unless they are compensated for their development costs and the loss of a key
revenue stream (ie we shall have to pay for the card, whether we use it or not).
Frankly, any thought that DSS would get away without compensation for
cancelling the card (as their lawyers claim) is absurd; and any thought that they
would get away with it and persuade ICL to carry on with the rest of the project
is even more so.
e the revenue that POCL can get from front-end banking will nowhere near cover
the loss of income from BA (DSS has suggested that some of the savings from
an earlier move to ACT could be recycled to help POCL, but most of these will
probably go to compensate ICL. In any case, subsidy does not get customers
into post offices, and the loss of “footfall” would be an additional serious blow).
e POCL are likely to keep a much higher proportion of their customers if they
migrate to ACT via the payment card than if they are forced to move straight to
ACT.
10. Option 3 is even less appetising. Whilst POCL could probably put swipe
card terminals to allow very limited banking transactions into post offices quite
quickly and cheaply, to start anew developing an integrated computer platform
would set their business prospects back by two or three years. The effects on ICL
would be extremely serious, and depending on the reaction of ICL’s parent Fujitsu,
currently struggling with the Asian financial crisis, could even bring the company
down. Fujitsu’s plans to float ICL on the stockmarket in 2000 would be destroyed,
and the effects on inward investment from Japan from Fujitsu and other companies
could be considerable.
Conclusion
11. Given that both the report of the Expert Panel and now the report of the
Steering Group believe that the Government’s objectives are best met by
continuing with Horizon including the payment card, we see no reason to weaken
our position, especially since DSS/BA opposition appears to be driven more by a
dislike of POCL than concerns about the technology.
12. The need for a decision is urgent. The ICL Managing Director is currently
in Tokyo, having been called in by a worried Fujitsu main board (who were earlier
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told that there would be a decision by July). Given the uncertainties, ICL are in no
position to continue indefinitely spending £8 million a month on development
work, and will anyway soon need to draw down a further substantial tranche of
funding. If the work slows or stops, further delays to the implementation phase of
the project become inevitable.
13. A second reason is that the much publicised delays and uncertainties
surrounding the project are having a damaging effect on the morale of
subpostmasters (who collectively are estimated to have sunk some £1 billion of
their own money into the network). Subpostmasters typically fund their retirement
through sale of the business, and the risk that Horizon will collapse has now begun
to depress sale values.
DAVID SIBBICK
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Lines to take
¢ Understandable that DSS have concerns about continuing
with the benefit payment card given the problems that
delays have caused the BA in terms of lost fraud savings;
your concerns about switching claimants from the payment
card to ACT within the space of a few years; and the overall
delay to moving to universal payment of benefits by ACT.
e Also recognise there are significant administrative savings
to be made for DSS from a switch to compulsory ACT.
e However, we do not believe that to pursue the Option 2
route - dropping the payment card element of the project
- is sustainable.
e We doubt whether this option is negotiable with ICL, other
than by throwing huge amounts of money at them in
compensation for their expenditure so far on the card and
the consequent loss of a key revenue stream. And if ICL
were forced to litigate on withdrawal of the card, it would
certainly bring the rest of the project down with it.
e There would be presentational difficulties about paying
large sums of money to ICL for the card without making
any use of it (waste of taxpayers’ money), especially if at
the same time benefit recipients were being transferred
against their will to ACT.
e There would be a major loss of confidence by
subpostmasters, who would be quick to see that
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arrangements for “front end” banking would in no way
offset the loss of direct BA business. Many might be
tempted to sell up before it is too late, resulting in large
numbers of network closures. DSS Ministers have very
publicly expressed their commitment to the success of the
project as a whole, and to the benefit payment card in
particular. There would be a strong sense of betrayal
amongst subpostmasters.
That is why we share the view of both the Expert Panel
and the Working Group that the Government’s
objectives can best be met by continuing with the project
as envisaged in Option 1 - provided satisfactory terms
can be negotiated with ICL.
Recognise that in the longer term ACT will be the normal
method of delivering welfare benefits, but surely important
to progress to that position in a phased and controlled
manner that minimises the impact on the network of post
offices, especially since access to post offices will be a key
element in the acceptability of ACT. Unique reach of post
offices is important for the less affluent and less mobile.
POCL believes the payment card will provide a valuable
bridge which will encourage customers to remain with their
post office in any large switch to ACT. There are
undoubtedly possibilities for POCL to generate new revenue
streams, for example, offering front-end banking facilities to
banks and in the context of Government Direct. Although
this may never fully replace a significant loss of BA income,
option 1 offers the best prospect of achieving a viable
future for POCL.
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e Keen to see post offices playing a role in our aspirations for
universal banking/social inclusion. Important, therefore, for
this wider reason that migration to ACT is done in a way
which does not threaten the stability of the network.
e Recognise that the post office network needs to evolve to
match both inevitably lower revenue streams from its public
sector clients and changing customer requirements. Need to
ensure that the network matches customer and client
requirements. Important that changes are made in a
controlled, steady fashion.
If Option 1 Fails
e Of course, if it not possible to secure a satisfactory
agreement with ICL or the project experiences further
significant problems, we will need to consider cancellation.
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