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To:
DAVID SIBBICK
CGBPS ir Mighael Scholar
From: CGBPS
Cll
CHRISTOPHER WOOLARD CGBPS
PS/Secretary of State Sp Adv
for Trade & Industry
Room! I
,-l_Mictoria. Street...
GRO
22 April, 99
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MEETING WITH POST OFFICE, 21 APRIL
You were present when John Roberts and Stuart Sweetman of the Post Office
met with the Secretary of State and Mr McCartney. Ms Britton, Mr Corry
and I were also present.
2 The Secretary of State began the meeting by outlining the current
situation and the 23 April deadline. The issues for the Post Office and
government were -
e did we want to proceed;
¢ if so in what format; and
e was termination a serious option.
3 The Secretary of State and Mr Roberts agreed that termination was not
an attractive option, and the question was really about finding an acceptable
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way forward for all the parties involved.
4 In Mr Roberts’ view the most attractive option was A, followed by B1
and then termination. The Post Office wanted option B to work, but not at
any price. The main problem was the high (£660m) up front costs, which
would need to be borne by the Post Office in the first five years. POCL could
not afford that, and nor in light of the White Paper the Post Office want to
cross subsidise the business. Sweetman stressed that the Post Office had
already built in £800m in option A sustained on the back of “Government
Direct” business. He also added that POCL and ICL were 95% of the way
there on heads of agreement.
5 Mr Sweetman then ran through the various costs that the Post Office
might face. The first was a £180m demand from ICL to cover the cost of
abandoning the BPC. This broke down to £50m for abortive software costs,
£30m in compensation to suppliers, and £100m in compensation for the loss
of income flow to ICL. In the first five years of the contract Mr Sweetman
expected to pay out £720m against a recycled cost saving from the Benefits
Agency of £55m.
6 Mr Roberts stressed that unlike in option A, the counters business
would become loss-making. Overall the Post Office would go from paying a
positive EFL to the point where there was no income from the Post Office for
HMG. He believed option A was still possible. In particular the Post Office
was willing to take over certain DSS functions, for example the card payment
system, and become the exclusive route into the contract for ICL. There was
some nervousness that the Post Office would be dependent on DSS to
provide certain information to fulfil the contract, but that was an area
whenever they needed ministerial and not commercial help.
7 Mr McCartney tried to summarise what had been said so far. If we
went with option B1 with all the risk on POCL, we would effectively
“bankrupt” POCL/the Post Office. If we didn’t have agreement and
terminated, we would bankrupt ICL. In effect the Secretary of State was
being asked to argue with his colleagues for option A. Mr McCartney
wondered that given the effort that had gone into option B1, whether
presentationally there was any way to draw a link between A and B1. He
proposed a two stage policy of option A followed rapidly by option B1. This
would have the advantage of giving HMT a way out, in that there would be
no further unplanned expense. However it would require the acquiescence of
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the Benefits Agency.
8 Mr Sweetman said that the DSS clearly wanted out of option A. The
main difficulty was that under option A the Benefits Agency still retained
responsibility for the payment from the point of which it was despatched
from DSS until the point at which it was received. Under B1 they simply had
an instruction into the banking system. Mr Sweetman stressed the need for
an automated front end to maintain the wider network. Without it the Post
Office was looking at an immediate £350m loss, with an effect on 19m
customers, and the loss of up to 8000 Post Offices. He argued that following
the Corbett proposals, the Benefits Agency could still move to ACT in 2005.
When pressed, Mr Roberts said that the Post Office could guarantee a move
to ACT in 2005 and would be prepared to accept the risk whereby a
Smartcard was not yet ready.
9 You asked whether that would be enough for ICL. Mr Roberts took
the view that if ICL then decided to take “their bat home” that was a decision
for them.
10 The Secretary of State concluded that he would speak to colleagues
along the lines of the ideas that had been raised at the meeting.
CHRISTOPHER WOOLARD
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