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DTI VIEWS ON CONTINUATION/CANCELLATION OF THE PROJECT
1. DTI view the 9 December package of proposals from ICL as providing an
acceptable commercial basis for continuation of the Horizon project (Option 1).
There are a number of wider considerations which also need to be taken into
account. These strengthen the case for continuation still further.
Continuation offers the lowest risk of damage to the network from migration
to compulsory ACT.
2.1 Key issues for Post Office Counters’ future are:
¢ the timing of the introduction of automation,
e given the Benefits Agency’s desire to move towards a system of payment
of benefits by ACT - the timing of this switch and POCL’s ability to
capture a significant proportion of this business and be paid for doing so;
and
¢ their ability to maintain subpostmasters’ confidence to maintain a
nationwide network of post offices.
2.2 Cancellation of the project will delay by perhaps 3 years the point at which
POCL has the automated platform it badly needs to support its existing services and
to expand into new areas which will contribute to the revenue base needed to
maintain the nationwide network of post offices. Large and complex IT projects
are notorious for their delays and there is no guarantee that another system would
not equally fall subject to delay.
2.3 Cancellation of the project, no matter how firm the assurances that POCL
will commission an alternative system, will damage subpostmasters’ confidence.
There is evidence already that the delays to Horizon are affecting the market for
post offices. When subpostmasters learn that they are to lose all benefits payments
to ACT, many may choose to leave the market, creating instability and uncontrolled
closures in the post office network. POCL believe that a longer time period to
manage the transition to ACT via the benefit payment card followed by a Post
Office smartcard will give them the best prospects of achieving a managed
transition. This will be crucial if POCL is to maintain anything like its present
network, given that banking transactions overall are predicted to generate only
about a third of the value of the current BA income.
2.4 The Horizon platform will provide a base for the development of a wider
range of on-line banking services than appears possible with interim banking
solutions; at an earlier point than would be possible with a replacement platform;
and in a manner which should help POCL to establish a long term commercial
relationship with banks which is of benefit to them. It should also enable them to
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offer electronic Government and other facilities based on a smart card at an earlier
point than they would be able to do so if they had to establish a replacement
system.
Implications for ICL/Fujitsu
3.1 Loss of the project would undoubtedly be a major blow to ICL. Just how
great would depend primarily on the stance taken by Fujitsu, who have claimed that
it could lead to the collapse of ICL. Failure of the project would mean ICL would
make a total loss of around £200m in 1998; which would effectively destroy its
prospects of flotation in 2000 and might indeed lead to Fujitsu to decide to divest
itself of the company. Given the current economic climate in Japan, Fujitsu’s
attitude may well have hardened; the company itself appears to have had a bad year
in 1997-98 with group post-tax profits slumping to just £26m. Even on a “least
bad” scenario, cancellation would badly damage ICL’s reputation both here and in
export markets, and its future prospects.
3.2 It is estimated that some 270 staff are employed directly on the Horizon
project at ICL Pathway (and many more at their suppliers). These jobs would
clearly be at risk if the project were to be cancelled. It is assumed that other parts
of ICL would either survive, or would be sold, and that the jobs concerned would
therefore be at much less risk.
3.3 Cancellation would clearly damage the credibility of the PFI process
generally, but particularly could be expected to make the funding of future large IT
projects on a public/private partnership more difficult to put together.
Interestingly, the PFI funding arrangements for Horizon have been portrayed as a
model for Japan and heavily promoted as such by Fujitsu’s Vice Chairman.
3.4 Cancellation would result in ICL seeking recourse to the courts to recover
sunk and committed costs of around £250m. This figure would also inform what
we might expect to pay for a negotiated settlement. Litigation, no matter how
strong we may believe our case to be (and ICL clearly believe theirs to be equally
strong), would be prolonged and messy. Whatever the eventual outcome, those
costs - together with our legal costs - need to be added to the equation in the
decision on whether to terminate or to proceed.
3.5 It is clear from the recent approach from Mr Naruto, Vice Chairman of
Fujitsu and Chairman of ICL, to our Ambassador in Tokyo, Sir David Wright, that
cancellation would have a serious effect on our relations with Fujitsu. Sir David
does not doubt it. Fujitsu have been a major inward investor in the UK, with well
over £700 million invested in the last decade. Whatever the justification from
where we sit, cancellation would be seen in Tokyo as a major breach of faith by the
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UK Government - a withdrawal from the project because we had changed our
minds on the policy but had sought to put the blame on ICL. We could expect
wider repercussions on inward investment from Japan as Fujitsu’s story permeated
other boardrooms.
DTI Posts Directorate
11 December 1998
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