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To: i: Secretary of State
MR MCCARTNEY Sir Michael Scholar
Mr Macdonald
Mr Baker CGBPS
a Mrs Britton PORT
DAVID SIBBICK. Mr Hosker FRM
DIRECTOR POSTS Dr Hopkins cil
Mr Osborne Legal C
Mr Seabrook COM
Mr Whitehead CGBPS 1
i Mrs Wright CGBPS1
Ms Anderson CGBPS1
20 July 1999 Mr Corry SpAdv
Ms Moore SpAdv
HORIZON NEGOTIATIONS: MEETING WITH ALISTAIR DARLING 22
JULY 1999
HORIZON NEGOTIATIONS
Issue
1. You have arranged to meet Alistair Darling at 11.00 a.m. tomorrow
(Wednesday 21 July) to find ways of enabling Post Office Counters Ltd (POCL) and
the Benefits Agency (BA) to make progress in the negotiations on the back-to-back
agreement which needs to accompany POCL's agreement with ICL.
Recommendation
2s That you should seek to make progress along the lines set out in the following
speaking notes.
Background
3. The background to the meeting is set out in the exchange of correspondence
between yourself and Alistair Darling attached as Annex A. The latest position in the
parallel sets of negotiations is set out below.
A. POCLACL negotiations
4. All outstanding issues have been resolved. The mechanical task of drawing up
the agreement and the accompanying schedules is taking a little longer than expected
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but both sides accept that the documentation in final form should be ready for
signature by Thursday or Friday of this week. The Post Office Board is currently
meeting to consider the agreement, and is I understand doing so against the
background ofa strong recommendation from eros that the agreement should be
B. BA/POCL agreement
Ds Negotiations between the two sides continued up until close of play last night,
today, but ended in stalemate. There are essentially three issues in contention.
6. First, acceptance testing. Broadly speaking, BA want to transfer their
acceptance testing rights from their present agreement with ICL into POCL's new
agreement with ICL. They say that they are not willing to enter into a contract with
POCL worth in excess of £100 million without being able to satisfy themselves that
the system will in fact work. POCL's position is that BA have fought for years to get
out of their contractual relationship with ICL, and cannot expect to retain rights,
exercised through POCL’s agreement with ICL, when they no longer have contractual
responsibilities. At a more practical level there is no doubt that two sets of acceptance
testing would inevitably delay what is already an extremely tight timetable if national
roll-out of the Horizon platform is to be completed by end March 2001. POCL's
suggested compromise, which seems a reasonable one, is that they will share fully and
openly with BA the results of all their acceptance testing, in return for which BA will
drop their insistance on separate testing.
7. Second, floor payments. POCL have argued that the minimum guaranteed
payment levels, or “floor” under their existing contract with BA which runs until 2005
should remain in place unchanged. The BA position is that they would like the floor
removed from the agreement altogether. It seems unreasonable that the floor should
not remain in place until 2003, during which period Ministers have guaranteed that
existing paper-based methods of paying benefits at post offices will continue
unchanged. Equally, however, Post Office demands that the floor should remain in
place unchanged between 2003-2005, when BA will be migrating the majority of
benefit recipients to payment by ACT, look excessive. A reasonable compromise here
might be that the floor should remain unchanged until 2003, which ought not to cost
BA anything unless, as some in POCL fear, BA are plotting to accelerate the take-up
of ACT in advance of 2003 and contrary to the clearly expressed collective position of
Ministers. A revised floor would then be put in place to cover 2003-2005 which took
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proper account of the planned migration of most benefit recipients to ACT during that
period.
8. Third, and the most contentious, is how much the Benefits Agency should pay
. POCL claim that the
Horizon platform will cost them i in n round figures £1 billion (this figure seems correct
once POCL have properly added the VAT which they will have to pay on the purchase
from ICL). They then say (again probably correctly) that OBCS will represent, at least
in the early years, about one-third of the total business conducted over the Horizon
platform. They conclude from this that BA should pay them in excess of £300 million
(ie one-third of £1 billion). I regard POCL’s position on this as unreasonable and
indefensible. I have argued with them that the Government is contributing £480
million towards the capital cost of the project, and that the most they can look to
recover from BA is £173 million (i.e. one-third of £520 million). POCL have argued
that the £480 million was already their money (it was not) and that, in any case, it is
needed to help bridge the funding gap once the payments from BA begin to reduce in
2003. We have told them that this longer term funding gap is to be addressed
separately by Ministers and will first be the subject of an interdepartmental study,
probably conducted by the PIU. BA have offered to pay £111 million for OBCS,
which leaves a gap of £62 million from the £173 million which, as noted above, might
be a reasonable share for OBCS to carry (this is, of course, £63 million over the life of
the project whilst the announced expected savings from OBCS amount to £100 million
each year).
DAVID SIBBICK
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SPEAKING NOTE
e Grateful that you have agreed to see me. The ICL/POCL negotiations are now
virtually complete. The Post Office Board appear content with outcome, and the
agreement should be ready for signature by end of week. However, the PO
Board have made it clear that they will not sign the agreement with ICL until the
back-to back agreement between POCL and BA is also ready for signature. If
the agreement with ICL is not signed by end July, the project automatically
terminates and ICL are to be paid a termination fee of £150 million. I appreciate
the constraints on DSS/BA budgets, but we need urgently to find a way through
this impasse.
e Despite several rounds of negotiation, BA and POCL appear a long way apart.
There are three outstanding issues on which I hope we can make progress today:
e First, acceptance testing. I fully understand BA's desire not to enter into a
contract with POCL costing in excess of £100 million without the right to verify
for themselves that the system actually works. However, two separate sets of
acceptance testing would inevitably delay progress with the programme, and the
projected timetable is extremely tight if national rollout of the platform is to be
achieved by end March 2001. POCL are apparently willing to share fully with
BA the results of all their acceptance testing, but cannot accept - and I have
sympathy with this view - that BA should be able to carry out their own
acceptance testing when they no longer have a contractual relationship with ICL.
Provided that POCL can convince BA that they will carry out acceptance testing
and the evaluation of it with sufficient rigour, could not BA accept POCL's offer
to share fully with them the results of all acceptance testing?.
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¢ Second, guaranteed minimum payments. I understand that BA would like to
withdraw all provision for minimum guaranteed payment from the contract.
POCL, on the other hand, want the existing provisions to continue unchanged
right through to 2005. Both positions seem unreasonable. Against the
background of the assurances that we have collectively given that there will be
no change in the existing means of paying benefits at post offices before 2003, it
is surely not unreasonable for POCL to expect that the existing provision for
minimum guaranteed payment will continue unchanged until that point in time.
This would not be a costly concession for BA to make, whilst offering POCL
some degree of reassurance of a continuing revenue stream during those years.
Similarly, I fully understand BA's wish not to continue with that level of
minimum payment between 2003-2005 as though nothing had changed, when
the reality is that we have taken a clear policy decision to phase out paper-based
payments at post offices during that period. I suggest that a reasonable
compromise might therefore be to leave the floor unchanged in the years up to
2003, but to put in place for 2004 and 2005 revised floors which reflect
realistically the expected rate of migration to ACT during that period.
¢ Third, payment for OBCS. I understand that POCL have been looking for a level
of payment for OBCS which seeks to recover one-third - the expected percentage
of total transactions through Horizon that OBCS is expected to represent in the
early years - of the total cost of the platform of around £1 billion. We have made
it clear to POCL that we regard this claim as unjustifiable. It ignores the £480
million that we have agreed to contribute to the capital costs of the project. I do,
however, suggest that it would be reasonable for OBCS to bear one third of the
costs of the platform less our contribution of £480 million. This would require
BA to contribute £173 million over the life of the project as against the £111
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million which I understand they have already offered. There is, therefore, a gap
of some £62 million over the life of the project. In the interests of reaching the
agreement which is essential if the Post Office are to sign with ICL, would it not
be possible for BA to agree to meet this additional £62 million spread over five
or six years, recognising that OBCS will produce savings for the Benefits
Agency of around £100 million each year?
A deal on the outstanding issues on the basis I have described would clearly fall
some way short of POCL’s ambitions. If you could accept it, I would be willing
to do my best to persuade the Post Office Board to sign up to it, and in turn to
sign the ICL agreement.
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