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To: ci: Sir Michael Scholar
SECRETARY OF STATE _} separate va Macdonald CGBPS
MR MCCARTNEY }copies Mrs Britton pean
Mr Fraser IBB
From: Mr Sklaroff COM
DAVID SIBBICK Mr Hosker FRM
DIRECTOR POSTS Dr Hopkins cil
i I Mr Osborne Legal C
gham Palace Road Mr Brebner PORT
1 ~. Mr Leese PORT
GRO Mr Whitehead CGBPS 1
Lencnnnnnnnnnenennncancnennnd Ms Anderson CGBPS1
16 April 1999 Mr Corry SpAdv
Ms Moore SpAdv
BA/POCL AUTOMATION PROJECT: HORIZON: REPORT TO
MINISTERS
1. You are to meet with your colleagues at 12:15 on Monday (19 April) to decide
the way forward on the Horizon project.
2. After an immense amount of effort by all the parties concerned over the past
two or three days to refine and analyse the costings associated with Option B (the
smartcard-based post office benefit account) the inescapable conclusion is, looked at
natrowly, this option is significantly more expensive than Option A (the benefit
payment card). Figures produced by KPMG for the public sector side put the gap at an
NPV of £700 million. This conclusion is scarcely surprising since Option B involves
paying ICL for the aborted benefit payment card and then paying on top of that for the
development for the Post Office benefit account and for the smartcard.
3. This led the Treasury to produce at lunch time today a draft report by officials
for Ministers concluding that Option B is too expensive and should be rejected by
Ministers; and that Option A is undeliverable - not for technical reasons but because
of the "dysfunctional relationships" between the contracting parties - and should also
therefore be rejected. This leaves only termination which should be accepted by
Ministers as the least bad of three thoroughly unattractive options.
4. I said immediately that DTI officials could not be party to such a conclusion. It
was therefore agreed that the text of the report would be changed to make clear that
this conclusion was that of Treasury officials (and possibly of DSS officials too,
though they also wished to consider their position) and that DTI officials would
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urgently supply additional text setting out the DTI/Post Office position. I attach the
text which I have this afternoon passed to the Treasury. Treasury officials hope to
issue a revised (?final) version of the report incorporating both DTI and DSS
comments later this afternoon, but it is doubtful whether this will be available before
you depart for the weekend.
5.
We will provide further briefing over the weekend based on the final version of
the report once it is available. I would, however, make the following points:
The Prime Minister's remit was to explore an alternative way forward to Option A,
not to introduce the already discarded option of termination.
Option B was specifically designed to retain footfall for the Post Office as
effectively as Option A. For their own reasons, POCL and ICL have decided to
agree on much more pessimistic assumptions for Option B. If the same take-up,
attrition and volume assumptions on which Option A is based are applied to Option
B, the NPV gap of £700 million is immediately reduced by £250 - 300 million. A
further £75 million of the gap is attributable to the smartcard which is crucial for
Government Direct applications and which is not included in Option A.
I understand - though there is still some confusion about this - that technically there
is no reason why the restricted Post Office benefit accounts could not, at a later
stage, have additional facilities such as direct debits and deposits from other sources
added to them, thereby enabling these accounts to make a useful contribution to the
wider Government policy on social banking.
The NPV calculations so far take no account of the potential which the early
provision of a base of some 18 million smartcards in the market place should give to
POCL to earn commercial revenue, as compared with Option A. I have asked
POCL to drive forward urgently over the weekend the work they have started with
ICL on this, so that there will be at least a preliminary assessment available before
your meeting on Monday.
Finally, the history of Option A is indeed one of dysfunctional relationships, but
tame acceptance that two public sector bodies would refuse to give effect to a clear
collective decision by Ministers is a sad basis for deciding on termination, with all
the damage that would do.
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