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To: ci: Sir Michael Scholar
SECRETARY OF STATE _} separate Mr Macdonald
MR MCCARTNEY }copies Mr Baker CGBPS
Mrs Britton PORT
Mr Fraser IBB
From: Mr Sklaroff COM
DAVID SIBBICK Mr Hosker FRM
DIRECTOR POSTS Dr Hopkins CII
i Mr Osborne Legal C
‘rebner PORT
G R (@) ; Mr Leese PORT
L I +. Ae ee 2 .Mr Whitehead CGBPS 1
——— Ms Anderson CGBPS1
27 April 1999 Lh dg.g, Mr Corry SpAdv
'sMoore SpAdv
2 use cd
BA/POCL AUTOMATIONPROJE! Hi ZON: MEETING WITH DR
NEVILLE BAIN AND JOHN ROBE ON WEDNESDAY 28 APRIL 1999.
ISSUE
L The line to take at your meeting with Nevillle Bain, Post Office Chairman and
John Roberts, Post Office Chief Executive tomorrow morning at 10.30am.
PURPOSE OF MEETING
2. You have called the meeting to discuss progress on developing Option B1, and
in particular ways of bridging the £700 million NPV funding gap (which has now been
reassessed at some £850 million) between Option B1 and Option A. The meeting will
take place against the background of the letter you received yesterday from the Post
Office Chairman making it clear that without very substantial Government funding
there is no commercial case for Option B1, and that without Government
guarantees that such funds will be made available the Board will not support it.
BACKGROUND
35 Since you met with your colleagues last Wednesday evening to discuss the way
forward there have been further intensive discussions between all the parties. You
may find the following points helpful to inform your discussion with Dr Bain and Mr
Roberts:
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e ICL/Fujitsu have agreed to allow negotiations to try to find a way forward to
continue up to an absolute deadline of 10 May. Steve Robson has written to ICL on
behalf of Ministers promising a decision by then, and promising to pay ICL’s
audited costs up to that date and subject to a ceiling of £8 million. Steve Robson’s
letter identifies POCL as the channel of payment, but despite the agreement we
understand you have with the Chief Secretary, the Treasury have so far failed to
give POCL an assurance that they will be reimbursed for the payment, and the
Post Office have said that they will refuse to release the payment until they
have received such an assurance.
e The table below sets out in column 2 the additional costs to POCL (POCL’s own
figures) of Option B1 over Option A. Column 3 shows the £180 million “up
front” compensation for dropping the benefit payment card which ICL require
within 30 days of signing Heads of Agreement. Column 4 sets out the savings to
the Benefits Agency (DSS/BA figures) of paying benefits through BACS into
bank accounts/PO benefit accounts.
Funding requirements for Option B1.2
Year POCL required I ICL Pathway Potential
funding (£m required funding I available funding
1998/99 prices) (£m 1998/99 from DSS (£m
prices) 1998/99 prices)
1999-00 -20 -180 -90
2000-01 -70 -50
2001-02 -130 -40
2002-03 -190 40
2003-04 -310 190
2004-05 -310 340
2005-06 -430 540
2006-07 -440 540
2007-08 -250 540
2008-09 -120 540
2009-10 -100 540
-2370 -180 3090
e These figures need further verification, but if substantiated show that the
Government could if it wished fund the entire incremental cost of Option B1
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over an 11 year period from the savings the BA will make over the same period
by not proceeding with the benefit payment card.
e However, within these totals there is a substantial disconnect in the phasing of the
two streams, with BA showing negative savings in the early years and only
catching up with POCL’s funding requirements by 2004/5 (though moving rapidly
ahead thereafter). One way of helping to overcome this disconnect would be
through adjustment in the PO’s EFLs in the early years. Another would be through
borrowing, though the Post Office will want any arrangements for funding
Horizon to be ring-fenced from their strategic plan. Even with Government
funding as set out above, the returns from Horizon are likely to be low, and the
Post Office will not want the project to pre-empt other, more profitable,
investments elsewhere within the Post Office.
e As to how the necessary levels of funding could be channelled into POCL, it would
clearly be desirable for ICL’s £180 million compensation demand to be paid
separately and “up front” to deal cleanly with the past and avoid distorting the
future costs of the project. Another possibility would be an early contribution to
the costs of setting up some 15 million PO benefit accounts which, it is believed,
can never be profitable.
e However, the bulk of the funding is probably best channelled in the form of
payments to POCL for the delivery of Modern Government services. There are
a number of advantages to this route. The footfall it will bring to both the private
side and the PO side of the business will usefully leverage the beneficial effects of
the payment, whilst at the same time minimising the risk of a state aid challenge.
There are however two important points to note here:
e First} POCL’s business m Plan Miedo Daeieee ie Senetaie a ese)
target) would be reserved for POCL before th the Board could incorporate " as
contributing to the business case for Option B1. From the Government’s
viewpoint, the case for so doing (probably on a strict cost-plus basis and subject to
stringent efficiency criteria) is that if for social reasons the Government is anyway
committed to contributing to the maintenance of the network of post office counters -
and more than half the business conducted at them is public sector business of one sort
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or another - the true marginal cost of delivering Government services through them
will be very low.
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LINE TO TAKE
e Grateful to PO for spelling out concerns. Will ensure that they are all
taken fully into account when reaching this very difficult decision
shortly.
e In particular recognise the Board’s need for a clear understanding of
the Government’s position on funding in order to establish the business
case for Option B1. Officials are continuing to work on this.
e Appreciate the efforts of PO team in contributing to the search for a
solution. Hope that the PO will continue to explore ways in which they
might help to minimise the substantial NPV gap between Option B1 and
Option A.
¢ Given the history of the project so far, and in particular the difficult
public sector relationships that have characterised it, have grave doubts
whether Option A is in practice deliverable. Know that ICL share these
doubts. And anxious to avoid termination if at all possible because of the
damage it will do to ICL, to our relations with Fujitsu, the largest
Japanese inward investor, and the delay that would be caused to
modernising POCL and the payment of benefits.
WHITE PAPER ISSUES
OUTSTANDING FINANCIAL ISSUES
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The Post Office Board meet today (27 April). I understand they will have been
informed that the Post Office is not clear on the essential elements of the reform
package even though publication is firmly set for May, and in particular that Neville
Bain has had no response to his letter to you of 9 March. As you know we cannot
respond until the Treasury has given their view on several points and you have judged
whether they are acceptable or not (hence my submission of 19 April with a draft
letter asking the Chancellor for a timely response). They are likely to be looking for
an early meeting, particularly in view of your meeting with the CWU next week.
LINE TO TAKE
Understand your concern. I will have a follow-up meeting on the White
Paper with you as soon as I can.
DAVID SIBBICK
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