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lan McCarmey MP » alt: Jee A
Minister of State TUK 1/@3
Department of
Trade and Industry
1 Victoria Street
Londoa
cc Mr Macdonald
Mr Baker CGBPS
Mr Macintyre CII
Rt Hon Stephen Byers MP Dr Hopkins CII
Chief Secretary to the Treasury Mr Hosker FRM
Parliament St Mr Sklaroff COM
London SWIP 3AG Mis Beton PORT
)\S Mr Osborne Legal C
/ Mr Sibbick CGBPS
Mr Whitehead CGBPS
14 December 1998 Ms Anderson CGBPS
File: KR/69
Mr fuser 186
De Sheche.,
BA/POCL AUTOMATION PROJECT: HORIZON
IT am grateful to Alistair Darling for copying to Peter Mandelson and mayself his letter to you dated 11
December, in which he set out his initial reactions to the latest ICL Proposals, J have discussed the letter
with Peter, and he has agreed that I should write in the following terms, as our own initial reactions
differ substantially on a number of points. You have also seen the Post Office Chairman’s letter to
Peter setting out the Post Office’s reactions. . .
Overall, Peter and I believe that ICL have now made a major move towards our Position which in all
key elements genuinely represents their last and best offer, at least on the main elements, Although
their proposals still fall some way short of meeting our demands in full, we believe that they
nevertheless lay the foundations for a commercially acceptable basis on which to take the project
forward. Gs
Taking Alistair’s points in tum, our understanding is that Fujitsu are indeed willing to back their
commitment to stand behind the project to the tune of some £600 million with legally enforceable
performance and funding guarantees, in exactly the same way as they have done for my own
- Department's recently awarded Elgar contract. If this is correct, as we believe it to be, it transfers from
the public sector and onto Fujitsu several hundred million pounds worth of risk, represents a major
concession on Fujitsu’s part from their previous Position, and removes at a stroke probably the largest
Single element of unacceptability from the earlier proposals.
Deparenest af Treds and Indomey
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Second, we are Puzzled by Alistair’s Suggestion that the new do Rot “make any Significant
Fourth, on slippage we agree that ICL’s failure to hit the milestone due on 14 December is
disappointing. we Pelieve thatthe ICL management are no less concerned, and that they will make
comprehensively audited by independent experts, and shown to be in g00d shape. Starting an entirely
new replacement system would Tepresent a far greater leap into the unknown.
Fifth, the fraud and administrative savings foregone as a result of delays to Horizon are indeed a cause
for regret. It is however worth Pointing out that Alistair’s figure of £800 tuillion savings foregone over
the next 10 years if we choose to continue with Horizon is broadly mirrored by the calculations both of
officials (in last July’s report by the Horizon Working Group), and later of KPMG, of the negative NPV
effects of cancellation on POCL (from loss of revenue, compensation to subpostmasters, and subsidy to
2
Deparumens of Trade ced indesery
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maintain network at given size), tae ta ait isthe risk of damages against us of £100 million or
more from litigation. in other words, the costs of terminating Horton trying to maintain the
cavingy mething approaching its present size could eqn eee "3
oe dp al a et © tk mr nd snl contro of eww
TaicLly, heey Alistair’s savings - and perhaps more o supe TEwe try to migrate recipients
pol ees, el a Ol et denn etn, wy fn
over £700 million invested in the last decade. Whatever the justification from where we
ard be seen in Tokyo asa major breach of faith by the UX Gone ne ~
withdrawal We ceald e ecnu had changed our minds on th pli bu had song ops the
Finally, cancellation would clearly damage the credibility of the PFI Process generally, but particularly
could be expected to
* difficult to put tog
make the funding of future large IT projects on a Public/private partnership more
ether. Interestingly, the PF] funding arrangements for Horizon have been Portrayed
as a model for Japan and heavily promoted as such by Fujitsu’s Vice Chairman,
dtu
Deparemant of Tre wa indonery
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Tam this letter to the Prit ini i inghi
re eehying roy Prime Minister, Alistair Darling, Jack Cunningtiam, Charlie Falconer an;
Deyarunent of Trade end tadhenery “