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To: SECRETARY OF STATE ci: Mr Scholar
MR McCARTNEY Mr Macdonald
Mr Baker
From: DAVID SIBBICK Mrs Britton
Director Posts Dr Hopkins CII
4 Mr Sklaroff COM
i Mr Hosker FRM
Mr Whitehead
26 November 1998 Miss Anderson
BA/POCL AUTOMATION PROJECT: HORIZON
Issue
1. We are to meet later today to discuss the future of the Horizon project. Is
there anything further we could or should do to prevent termination of the project?
What should our strategy be if the project is terminated?
Recommendation
2. To note, as a basis for our discussion.
Argument
Es The attached aide memoire sets out the recent history of the negotiations with
ICL to try to find a commercially acceptable basis for taking forward the project; the
recent ICL proposals which have succeeded brilliantly in alienating what little
support remained within Whitehall for continuing with the project; the key areas of
the proposals which the public sector side find unacceptable: the ICL and Fujitsu
perspectives as revealed at two recent meetings with Alastair Macdonald and finally
a section on the likely effects on the post office network of various scenarios.
Supporting Annexes cover the main Ministerial level correspondence with ICL
(included simply for ease of reference) but you will wish to note in particular Annex
H which contains an assessment of the likely effects on ICL/Fujitsu of termination.
Should you now see ICL?
4. ICL have been pressing very strongly to meet Ministers in order to set out at
first hand their case. At their meeting on 17 November Ministers concluded that to
allow ICL to conduct an intensive political lobbying campaign would not assist in
finding the commercial solution which is essential if the project is to continue. The
ICL case is of course already well known, and there is at this stage little that could be
said to ICL that has not already been said on numerous occasions. Our strong advice
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therefore is to continue to resist the pressure for a meeting, although we accept that
as the deadline for completion of this round of negotiations approaches, the pressure
from ICL for access to ministers may become irresistible.
The case against continuing with Horizon
5s DSS/BA have argued strongly that the case for terminating the benefit
payment card element of Horizon is overwhelming. Given ICL's indifferent
performance on the contract so far - and it is true that most of the difficulties and
delays have centred round the development of the benefit payment card - they
continue to challenge ICL's ability to deliver a working system even to the revised
timetables. More fundamentally, however, they argue that the benefit payment card
is yesterday's approach and that all the advantages lie in migrating benefit recipients
as quickly as possible to the payment of benefits directly into bank accounts (ACT).
6. They argue that this course will not only produce £0.4 billion administrative
savings annually for Government, but will provide a powerful impetus to wider
Government policy objectives around promoting greater access to bank accounts for
those who currently do not have them (social or universal banking); underpinning
developments around the Single Government Account initiative; and generally
creating a Government infrastructure to support a modern approach to Government
dealings with its citizens (electronic government, Government Direct, etc). They
argue that a proportion of the £0.4 billion administrative savings (which stem
essentially from the difference in cost to the Benefits Agency of an ACT transaction
(less than 2p) and a transaction through the benefits payment card or through the
existing paper based system (around 60p)) could be used to support the Post Office
Counters network and/or help it to purchase alternative technology. DSS/BA accept
that compulsory ACT will be politically difficult or impossible unless benefit
recipients - especially those in areas where banks and ATM machines are few and far
between - can be offered access to their accounts through post offices. This will only
become a practical proposition when post office counters are equipped with a
modern on-line IT platform whether it be the Horizon infrastructure but without the
benefit payment card or a different system altogether.
The case for continuing with Horizon
7. Benefits Agency payments to POCL currently run at around £400 million a
year and represent more than one third of POCL's annual income. Without this
income stream, large numbers of offices would become commercially unviable and
could be expected to close. Because the overwhelming majority of such offices are
franchised operations run in conjunction with a small retail outlet, typically a general
store or a newsagent/tobacconist, the precise effect is difficult to forecast. What is
clear, however, is that the payment of benefits brings footfall to the private side of
the retail outlet (as well as generating additional post office business) so that the loss
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of this business would have a leveraged effect. What will therefore be of crucial
importance to POCL in any move to ACT will be to retain as many benefit customers
within the Post Office system as possible. There are two aspects to this. First,
migration to ACT via the benefit payment card is likely to be much the most
effective means of achieving this objective. Second, any move direct from the
present paper based payment method directly to ACT would need to be very
carefully phased in time with the introduction into post offices of front-end banking
facilities. If Horizon, or the benefit payment card element of it falls, our strategy
must be to optimise the trade off between, on the one hand the desire to achieve as
quickly as possible, the administrative savings that will flow from the earliest
possible move to ACT, and on the other hand the need to ensure that post office
counters are able to offer front-end banking facilities before benefit recipients are
obliged to accept payment to bank accounts.
8. There is a more brutal point. There remain unresolved issues about how
willing the banks will be in practice to accept large numbers of accounts on which
they are likely to find it very difficult to make a profit. What is clear however is that
the banks will welcome such customers accessing their accounts through post offices
rather than bank branches. They are, therefore, likely to be willing to pay POCL for
carrying out the sort of transactions on their behalf. But this is likely to be true only
if POCL can offer something approaching the full range of current account facilities.
Even so, we suspect that they would be unwilling to pay more than around 10p per
transaction as against around 60p per transaction paid by the Benefits Agency.
POCL would therefore need to attract six or eight times the volume of banking
transactions (after allowing for the higher costs of handling the greater volumes) as
compared with Benefits Agency transactions to maintain an equivalent level of
profitability and this, of course, is simply not credible. Worse still, if POCL is forced
into using simple swipe card terminals to cover the gap until a replacement system
for Horizon is ready, the banks would be more likely to want to charge POCL per
transaction than to pay them. In time, other new business including electronic
Government may make a major contribution to POCL’s revenue stream, but over the
next few years migration to ACT via the benefit payment card offers by far the best
chance of achieving the transition with minimum damage to the post office network.
DAVID SIBBICK
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