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To: ci: Sir Michael Scholar
SECRETARY OF STATE _} separate we Macdonald coBPS
ARTNEY i
MR MCC. }copies Mrs Britton PORT
Mr Fraser IBB
a Mr Sklaroff COM
DAVID SIBBICK Mr Hosker FRM
DIRECTOR POSTS Dr Hopkins cil
I GRO I Mr Osborne Legal C
kingham Palace Road Mr Brebner PORT
G R Oo i Mr Leese PORT
NY Mr Whitehead CGBPS 1
Ms Anderson CGBPS1
18 April 1999 Mr Corry SpAdv
Ms Moore SpAdv
BA/POCL AUTOMATION PROJECT: HORIZON: MEETING WITH
COLLEAGUES 19 APRIL 1999.
1. My submission to you on Friday (16 April) covering the Treasury’s draft report
by officials to Ministers, and my dissenting DTI text, promised an update once the
final version of the report appeared as the basis for your discussion with colleagues
tomorrow (19 April, at 12.15).
2. There have been three developments since my submission, all of them reflected
in a revised draft (version 3) which emerged late on Friday evening from the Treasury,
and which we are faxing to you separately. Treasury officials were hoping to clear this
version with the Chief Secretary and Lord Falconer over the weekend, so there may be
yet another version at some point on Monday morning, perhaps circulated direct to
Ministers’ offices.
3. First, the Treasury have incorporated our dissenting (to termination as the
least bad option) text at paragraphs 30 to 36 on pages 8 -9 (our numbering, since
the report unhelpfully came with neither page nor paragraph numbering), and have
adjusted the remaining text accordingly
4. Second, my note on Friday stated that DSS officials were considering their
position. Unfortunately DSS have decided to support the Treasury in
recommending termination (para 39 on page 10)
5. Third, my submission on Friday made the point that the NPV calculations that
show Option B to be £700 million more expensive than Option A take no account of
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the potential which the early provision of a base of some 18 million smartcards in the
marketplace should give to POCL to earn commercial revenue (from both public and
private sectors), as compared to Option A. I have made this point repeatedly to the
Treasury, and asked POCL to work urgently with ICL on at least a preliminary
assessment of its potential. The results of this preliminary assessment, carried out with
assistance from the Treasury PFI team and CITU, emerged late on Friday and are
incorporated at paragraphs 14 -16 of the report - which disingenuously blames POCL
for withholding the information! The assessment has identified a potential revenue
stream worth £600 -700 million NPV - sufficient to eliminate the gap between this
option and Option A.
6. Frankly, this risks moving us from the ridiculous to the sublime, and the
Treasury are rightly scepitcal about the deliverability of such an outcome without a
separate and substantially enhanced commercial management for POCL.
Nevertheless, a combination of at least some significant commercial revenue from the
early introduction of the smartcard and a somewhat less pessimistic view on loss of
footfall together with a recognition of the wider benefits of this option compared with
the benefit payment card and the avoidance of entering a technological cul-de-sac
make Option B a much more viable way forward than the earlier Treasury paper
suggested. The relative attraction of Option B is likely to be enhanced still further by
the apparent recognition by the Treasury on Friday that the true costs of termination
are almost certainly substantially higher than has so far been allowed for in the
calculations. KPMG are doing further urgent work on this over the weekend.
Conclusion
7. In the light of these latest developments, I suggest that your line with your
colleagues tomorrow morning should be to press very strongly for a decision in favour
of Option B, recognising the consequential need for some restructuring and
strengthening of POCL management; and with Option A as very much a second choice
fall back option if it becomes clear that you cannot carry your colleagues with you on
Option B. You may need to remind your colleagues that the various remits that have
emerged from No 10 since Jeremy Haywood’s letter of 14 November last year clearly
sought to avoid termination if at all possible, for all the reasons set out in your letter to
your colleagues on Friday. Suggested lines to take follow.
DAVID SIBBICK
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SUGGESTED LINES TO TAKE
e Believe strongly that we now have the basis for a viable way forward with Option
B. It was always clear that without a revenue stream from the commercial
exploitation of the smartcard and the Horizon platform, Option B would appear
prohibitively expensive. This potential revenue stream has now been identified, and
whilst I agree with Treasury officials that at this stage it needs to be viewed with
caution, with a strengthened and restructured POCL management in place there
should be scope for the £700 million gap between Options A and B to be narrowed
to a much more manageable level. Also believe that the footfall assumptions made
for Option B may be unduly pessimistic, which would narrow the gap still further.
Avoids the technological cul-de-sac of the benefit payment card, and contributes to
wider Government objectives on electronic Government, and possibly on social
banking.
e Accept that the history of this project is the most powerful argument against Option
A. But it is well advanced and technically validated, and carries with it the lowest
level of uncertainty of any of the options. It enables BA to move more quickly
away from the inefficient and fraud-prone paper-based payment system; gives
POCL the modern, on-line platform it so badly needs. There could be rapid
migration from the payment card to smartcard enabled access to commercial bank
accounts permitting the early move to the payment of benefits by ACT. But this is
in my view a second best option.
e I set out in my letter on Friday the substantial damage that I believe termination
would cause to 18 000 subpostmasters and to the network of post offices, to our
wider plans for the Post Office, to ICL and to our relations with Fujitsu. To avoid
serious damage to the network of post offices, the move away from existing paper
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based would need to be delayed until the Post Office could equip itself with an
alternative technology platform (which might itself suffer the delays which appear
endemic in large complex IT projects). Given these very serious downsides, which
appear to have been clearly recognised in the remits we have been given by No. 10,
and against a background where Option B in particular now offers the basis for a
viable way forward for the project, I believe that we should firmly reject
termination.
Fallback position on termination
e Termination will cause immense handling difficulties with the subpostmasters (who
can expect to find strong support from the Communication Workers Union and the
tural lobby - especially against the background of our forthcoming Rural White
Paper), and some damage to the network of post offices seems unavoidable. If this
is to be minimised it will be essential for us to give an unequivocal public
commitment to the subpostmasters and others that there will be no change to the
existing paper based methods of payment until such time as the Post Office has been
able to equip itself with an alternative integrated on-line IT platform.
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