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concessions - an assurance that the Government would take a decision before 12
May when ICL are legally required to file their accounts; and a contribution
towards ICL’s on-going costs of continuing with the project pending that decision
(of up to £8 million). ICL interpreted this as a sign of our goodwill.
Fujitsu’s decision
3. The Fujitsu Board met this morning. On the basis of our further concessions
they decided not to terminate at this stage. They have stood down a presentation
of their end year results to analysts in Japan. They have, however, included a
provision in their accounts given the absence of a legally binding agreement to
take the project forward. However we understand it will be possible to remove the
provision if legally binding heads of agreement on a way forward can be signed
before the 12 May.
Next steps
4. The next steps are therefore:
. that Steve Robson is in the process of sending a letter to ICL giving them
an assurance that we will take a final decision by 10 May. Legal advisers
have cleared the draff, in particular our offer to make a contribution towards
ICL’s costs over the period, in order to protect our legal position;
[have spoken to Steve Byers who will be working with the Post Office to
cee whether there is any further scope to find a more affordable way of
delivering Option BI - either by reducing the costs or by firming up the
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s. At the same ti
Our fall-back POsitio;
ds
Tam copying this minute to Alistair Darling,
Falco
Stephen Byers, Charlie
ner and to Sir Richard Wilson, Geoff Mulgan and
Geoffrey Norris,
April 232 1999
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Li 4
ANe to Take: ONLY IF FUJITSUACL WITHDRAW
~~ SUACL WITHDRAW
. administration j
May 1996 toa consortium led by ICL under the PFI. tion in
more money, and have Consistently failed to meet deadlines. The system
should have been fully operational by the end of
years late.
last year, but is now Tunning 3
The Government has done all it can to find a way through the current
difficulties with the Project, and to salvage the time and effort all parties have
devoted to it. But it cannot do this at any price. It would be wrong for the
taxpayer to bail out ICL; and unfair to other suppliers who originally bid for the
contracts.
Even now, the Government would be willing to continue discussions with ICL.
But ICL/Fujitsu have now chosen to walk away.
The Government remains committed to the automation of post offices and will
support the Post Office in seeking an alternative system to meet this objective.
In the meantime, the Government will continue existing arrangements for
paying benefits, including over the counter at post offices.
Background
1 ‘The Horizon project was set up under the last administration with the
twin objectives of providin:
g an automation platform for the Post Office
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The Horizon Project is worth over £1 billion
money;
of Government/tax Payer’s
has the potential to affect the 15 milli
ion people who currently
collect their benefit payments at Post Office:
s; the 28 million who use the
network of 19,000 Post Offices; and the sul
bpostmasters who livelihoods
are involved. It is crucially important th
at the system works,
Brief history
A consortium led by ICL won the contract in 1996. Under PFI
arrangements, they undertook to meet the development cost of the
project, in the expectation that they would reap a substantial retum on
that investment once the Project was up and running.
It soon became apparent ICL that had overstretched themselves: they
underestimated the technical requirements and despite backing from
Fujitsu did not have sufficient financial cover.
ICL were placed in breach of contract by the public sector parties in
November 1997 for failure to meet a key milestone. Since then, far from
improving their performance there have been further delays and missed
milestones, with the end date for getting the system in place stretching
ever further into the future.
Under the original contracts the system should have been operational by
the end of 1998 and fully up and running throughout the Post Office
network. On current plans, it may be completed three years late at the
end of 2001; but the problems with current testing make even this look
unlikely.
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Key points
7. ICLdid not have to sign the original contracts, They took on the Project
willingly, in the hope of substantial profit. Government and the taxpayer
should not be expected to bail them out, if they have made an error of
judgment.
8.
And it would be unfair to others who competed for the contracts if we do.
we
a
Annee
ives:
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Q&A: ONLY IF ICLIFUJITSU DECIDE TO WITHDRAW
General
Regret that ICL has felt unable t
; ‘© continue with the Project despite the ublic
Sector parties’ best efforts to agree revised terms with them. But must :
Temember they are in breach of contract,
Even now, Government would be willin;
find a way forward, Bi
ut not at any price
bail out ICL; and unfai
8 to continue discussions with ICL to
ir to other supplie
- It would be wrong for the taxpayer to
Ts Who originally bid for the contracts,
What went wrong?
Project is large and complex,
the result of ICL’s failure to
Government remains fully
has been subject to significant delays which are
been trying very hard to fin
deliver. The Project is now running 3 years late,
ommitted to the objectives of the Project, and has
id a way to resolve the difficulties,
What is the Government Going to do instead?
Government is fully committed to the objectives of the Horizon Project to
provide an automated platform for post offices; and to provide a simple, fraud-
resistant way of paying benefits. The Government will support the Post Office
in seeking an alternative automation platform. Benefits will continue to be paid
Over post office counters in the usual way. DSS will be seeking alternative
ways of reducing fraud, building on the wider Programme it has in place.
What will be the impact on PO Counters? W
closures?
on’t it result in widespread
Government remains fully committed to maintaining a nationwide network of
post offices, and recognises vital role that post offices play in communities,
Government will support the Post Office in seeking an alternative automation
platform, but in the meantime it will be business as usual for post offices.
Benefits will continue to be paid over post office counters as they are now.
What about rural post offices?
Government remains fully committed to maintaining a nationwide aon of
post offices, and recognises vital importance of post offices in rural
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an automation platform.
What will be the impact on benefit customers?
Vast Majority of 20 million benefit customers will be unaffected. Existing
arrangements will continue, including over the post
Those currently using the b
office counter as now,
C i enefit payment card - around 30,000 people - will
See no interruption of their payments.
Is the Government
bank accounts?
going to introduce compulsory payment of benefits into
Government will be exploring alternative wa:
\ 'ys of achieving their aim to secure
@ convenient, cost-effective and fraud-free w.
ay of paying benefits.
Benefit recipients can currently opt to receive their benefits through their bank
accounts. But Government wants to
to do so can continue to collect thei
ensure that all benefit recipients who wish
be exploring alternative solutions
r benefits in cash at post offices - and it will
that achieves this.
What about the White Paper on the Post Office?
It clearly remains our intention to publish the White Paper on Post Office
reform. We need to consider with interested Parties, not least the Post Offi
itself, the implications of these events for our modemising programme be!
the White Paper issues. But the Government remains committed to providing
the Post Office with greater commercial freedom and to a more competiti
‘ive
postal market and independent regulation, as set out in our policy statement on
the future of the Post Office (Mandelson, 7 December 1998).
ice
fore
Isn’t this just another example, in a growing list, of failed PFI projects in
the IT sector?
There is nothing fundamentally wrong with PFI procurements nor are there any
fundamental flaws with taking IT projects forward under PFI — others are,
being delivered successfully: providing good. value and service to the Public-
sector and attractive return to the private sector investors. For example:
the OSIRIS project supplied by Siemens Business Service for the Welsh
Office
ArmyMail Project supplied by Bull for the Ministry of Defence
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Employme,
nt Partnership pro:
4 P Project suppti
luc; ied by
ation and Employm rt pp Y EDS for the Department for
In contrast an
i ‘umber of convent:
difficulties - entionally procured IT proj ‘
= ulties ~ for example the delays to the National ay ae see
Nroute Centre (NERC), ir Traffic Services New
We have been workii
ing with i ‘
Toject and we fing ite the Supplier to address their
Problems with th
‘ortunate that they have needed to take this pag
What will be the impact on ICL? wh
UK's IT sector, as Well as a valued supplier
'S 1s only one of a Significant number of contracts
the ELGAR Contract for DTI. ICL and Fuji cai
who make their own commercial decisions, It j
plans.
ICL says that its the fault of the Benefits Agency/PO Counters?
ICL were placed in breach of Contract in 1997 and since then have Consistently
failed to meet deadlines, Whole series of independent Teports which confirm
that fault lies at ICL’s feet. Public Sector has met all its commitments under the
contracts,
ICL did not have to sign the original contracts. They took on the project
willingly, in the hope of substantial profit. Government and the taxpayer
should not be expected to bail them out, if they have made an error of
judgment.
ICL say Ministers have been too slow to take decisions?
Government is committed to the objectives of the Project, and orice poe bo ;
way of resolving the difficulties. Large and complex project, significan
f public money at stake. Only right that it should consider very carefully how
of pul
to move forward.
.
P.isee
199 lO:g9
22/0479
ICL sa
'Y that the
Overnment
ecause the: did no Hiss has allowed the term;
Overnment term: ‘ontinu,
ICL’s commercial position is a matter for ICL and its Parent group Fujitsu,
What are the implications for i i
‘ward investment by ICL’
company, Fujitsu? hae
cide on the future of j
Government will do all
ts investments in the UK but the
location for the compan:
it can to ensure the UK remains
an attractive investment
Yy.
What are the implications for the future investment from Japan generally?
The issues here are not about Ja
Tange of factors which have led
investment location for Japanesi
panese investment in the UK. There are a wide
investment here. These factors
to the UK being Europe’s number one
€ companies with over 40% of. Japanese
have not changed.
Is termination of the Project a reaction to Fujitsu closing its semi-
conductor plant in the North East?
re is absolutely no connection whatsoever between these two events. The
{Seatdetoen caries to work closely with Fujitsu and its Response Group to
try and find a buyer for the Newton Aycliffe plant and together hs Bove
succeeded in placing 80% of the 570 strong, workforce in alternati
employment, full time training or higher education.
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asury
f the Horiz,
ye Most Fecently thi eH
failing to meet
“7700 O7S3RM PMS CONS
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22)
4/09 18:9. Es
22/04/99
Oject by external I
tha T ex
On current working plans updated as recen eptember 1998, the
tly as Septemb, 199,
first milestone thereafter - Model Office Testing - was de! layed by 2
sting
very release ha:
s been subject to reductions in the origi lly pl:
functionality nl seat
and even when each Telease has gone live, there have been faults and
Problems which have resulted in the need
for Pathway to reimburse DSS
in the current trials the
known problems have tisen from 46 in November
1998 to 139 at the end of March 1999; and currently 146 have not been
resolved
nearly 16 million people should by now be paid by the benefit payment
card. In fact only 30,000+ people are currently being paid by the benefit
payment card - for one benefit only
oll out of the system to 19,000 post offices should have been completed
at the end of 1998. But only limited functionality is available currently in
204 post offices
delays to the programme have already cost the Government over £200m
in savings they would otherwise have expected to make
Poge 9
AGE 003/4 — RightFAX
Pike Oar
2 so}
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avisers
Office to
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ing vp O°
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Restricted - Policy and Commercial
ICL ASSERTIONS THAT SPONSORS
THE PROJECT
ARE RESPONSIBLE FOR DELAYS TO
Sponsors changed technical specifications
Assertion unsupported; no significant changes in sponsors’ requirements.
Volume of changes to technical specifications sought by both ICL Pathway and
‘sponsors is no more than expected for project of this size and complexity.
Decision to award contracts lo ICL Pathway was based on solution tendered by
ICL Pathway in response to sponsors’ requirements.
Sponsors have been concerned to ensure compliance with contracted solution,
subject to any agreed changes.
Project Delivery Authority (PDA - joint BA/POCL project management team)
interfered and added to delays/costs
PDA established to manage relationship between ICL Pathway and sponsors; and it
played invaluable role in management of project and provided essential single point
of contact between ICL Pathway and sponsor organisations.
‘Was inevitable that organisation would evolve as project moved from procurement
phase to implementation. This resulted in sponsors’ proposal that PDA should be
reformed as Horizon project.
‘No documentary evidence of ICL Pathway complaining to sponsors about role of
PDA. ICL Pathway, by contrast, found it necessary to bolster own organisation,
particularly in management, planning and testing areas, in recognition of its serious
underestimation of task to which it was committed.
Alleged failures of the Benefits Agency
Suggestion that BA failed to meet its obligations under contract in supply of data to
ICL Pathway and that this added to ICL Pathway's delays and costs is
revise project plans in recognition that all parties, including ICL Pathway, would
have difficulty ia meeti
ing their obligations under terms of original contract. The
resulting plan was agreed on no-fault basis.
In February 1997 all parties, including ICL Pathway, entered into negotiations to
Since that time, BA has met all its obligetions under revised contract to time except
where there wore dependencies on ICL Pathway and ICL Pathway was unable to
meet its own commitments.
apart
PUrd ay
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Bet 27 4700 roi00;
Sasury
HM Treasury
22/04/99 19.04
P.eeg
Ich requested establishment of Treasury Review
. No, Review Proposed by BA to Provide j
f of
nies naga tigers assessment Project and
Public sector parties Very pleased that after some discussion ICL felt able to take
Part.
Benefit Agen:
faith
cy a reluctant partner to Project and may not be Regotiating in good
Sponsors have very interest in seeing Project objectives secured, not least to avoid
Adding to costs already incurred as result of TCL Pathway's delays,
Increased costs to [CL Pathway asa result of delays (wrongly) attributed to sponsors
and the need secure commercial terms which will enable it to recoup its investment
. Sponsors believe ICL Pathway is responsible for the delays and any additional
Costs arising.
‘This is a PFT contract under which service provider agrees to bear substantial risks
‘associated with design, development and implementation.
Sponsors believe ICL Pathway bas been in breach of contract since November 1997
for failing to complete an
operational trial required under terms of contracts. As
‘Consequence of this and other delays caused by ICL Pathway, both sponsors have
incurred very significant additional costs.
'
Any proposal to tansfer risk or costs back to public sector therefore unacceptable
in view of ICL's responsibility for delays.
{BSS
A kn 1999.
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: the project pe
*4 ign of our goodwith
Next steps
4.
The next Steps are therefore:
see whether there is any further Scope to find a more affordable way of
delivering Option B1 - either by reducing the costs or by firming up the
7)
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potential revenues;
. the Post Office and ICL will continue to work up the draft heads of
agreement for Option B1. It is very important the DSS/BA are involved in
these discussions to ensure that Alistair Darling's interests are protected.
5. At the same time my officials will continue to explore with DSS and DTI
our fall-back position.
6. We will need to be in a position by the end of next week to begin making
a final decision about whether the affordability gap on Option BI can be closed.
I will report back with further advice on the basis of this further work in advance
of the 10 May deadline.
7, 1 am copying this minute to Alistair Darling, Stephen Byers, Charlie
Falconer and to Sir Richard Wilson, Geoff Mulgan and Geoffrey Norris.
Arai 232 1977
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WITHOUT PRE,
CONFIDENTIAL - COMMERCAL AS
Fad
Wa
PRIME MINISTER i i
BA/POCL
The Fujitsu Board met
this morning. They have decided not to walk away from
the contract at this stage. This is on the basis that we would write to ICL
an assurance to take a decision by 1
0 May; and that we
contribution towards their (audited) cash costs over this period. Fujitsu has
included a provision of £300 mn in its accounts to re lect the
far spent on the Project, but have stood down the planned announcement of
their results to analysts in Japan. The Provision can only be removed if legally
binding heads of I agreement are reached on a way forward by 10 May. We must
How pursue urgently with all the parties the large affordability gap associated
with Option BI.
giving
would provide a
sums they have so
Background
My minute of yesterday recorded where matters stood in advance of the Fujitsu
Board meeting this morning to sign off their end year accounts, Ministers - Alistair
Darling, Steven Byers, Charlie Falconer and myself - had agreed that
to do everything possible to keep Option BI in play. How:
ve wanted
ver the very significa
affordability gap meant that further scrutiny of POCL’s business case was required
before a decision could be taken. This would take a further period of two weeks.
This message was communicated to ICL, and through them, to Fujitsu.
2 ‘This was significantly short of what Fujitsu required to avoid a provision in
their accounts. On our instruction Steve Robson had offered ICL two further
Py Kl
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Fujitsu’s decision
3. The Fujitsu Board met this m
‘orning. On the basis of our further concessions
they decided not to terminate at thi
is stage. They have Stood down a presentation
of their end year results to analysts in Japan. They have, however, included a
Provision in their accounts given the abs.
provision if legally binding heads of agr
ement on a way forward can be signed
before the 12 May.
Next steps
The next steps are therefore:
that Steve Robson is in the process of sending a letter to ICL giving them
an assurance that we will take a final decision by 10 May. Legal advisers
have cleared the draft, in particular our offer to make a contribution towards
ICL’s costs over the period, in order to protect our legal position;
I have spoken to Steve Byers who will be working with the Post Office to
see whether there is any further scope to find a more affordable way of
delivering Option B1 - either by reducing the costs or by firming up the
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Potential revenues;
3s
6. We will need to be in a position by the end of next week to begin making
a final decision about whether the affordabi
1 will report back with further advice on the
of the 10 May deadline.
ility gap on Option BI can be closed.
basis of this further work in advance
qs 1 am copying this minute to Alistair Darling, Stephen Byers, Charlie
Falconer and to Sir Richard Wilson, Geoff Mulgan and Geoffrey Norris.
Newee Sim re
GRO
ALAN MILBURN
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Arai. 232 1997
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dS 22/,4/09 22:46; =
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CONFIDENTIAL - COMMERCIAL
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Oh Cs lere be Mtr en 3
PRIME MINISTER fra leale ryk tt ke fo, rehvar ly
VU Shrink
BA/POCL
WU 2 ke
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The Fujitsu Board meet tomorrow morning to decide whether to continue with
the Horizon project. The large affordability gap on the alternative option means
that we were unable to provide the assurances which Fujitsu were hoping for by
now. We have done and will continue to do everything we can, short of this, to
keep Fujitsu in play, But we have also prepared a handling strategy in the event
that Fujitsu walk away from the project.
“Ophea”
Last night I met Alistair Darling, Stephen Byers and Charlie Falconer to discuss
the way forward on the Horizon project.
Assessment of options
2: We agreed that option A (the Benefit Payments Card or BPC option) was
unviable in view of ICL’s failure to deliver and the breakdown in relations
between the parties. Although option A currently looks like the cheapest option
it is already three years delayed, and every six months additional delay adds a
further £100 million to the costs. In addition, ICL appear increasingly disinclined
to cooperate on option A.
a; We agreed that option BI (the alternative option) has many attractions over
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PRIME MINISTER
BA/POCL
The Fujitsu Board meet tomorrow morning to decide whether to continue with
the Horizon project. The large affordability gap on the alternative option means
that we were unable to provide the assurances which Fujitsu were hoping for by
now. We have done and will contin to do everything we can, shor? of this, to
keep Fujitsu in play. But we have also prepared a handling strategy in the event
that Fujitsu walk away from the project.
Last night I met Alistair Darling, Stephen Byers and Charlie Falconer to discuss
the way forward on the Horizon project.
Assessment of options
2
We agreed that option A (the Benefit Payments Card or BPC option) was
between the partie
unviable in view of ICL’s failure to deliver and the breakdown in relations
Although option A currently looks like the cheapest option
it is already three years delayed, and every six months additional delay adds a
further £100 million to the costs. In addition, ICL appear increasingly disinclined
to cooperate on option A.
We agreed that option B1 (the alternative option) has many attractions over
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Option A. However it looks currently unaffordable with a net present value (NPV)
estimated at £870 million more than Option A which was the basis on which
public expenditure provision was made for the project. Steve Byers reported on
his discussions with the Post Office and with POCL about securing commitments
to option B1 to make it affordable by narrowing the NPV gap. In short, thus far,
the Post Office cannot give any financial commitment to bridge the £870 million
NPV gap through the prospect of generating higher revenue or finding ways to
reduce costs, However, Steve Byer
s believed that given a bit more time, it might
be possible to persuade the Post Office to make some progress on this.
Discussions with ICL
4. In view of the undeliverability of option A and the fact that option BI,
although attractive, remained unaffordable, but with the prospect that further work
might bridge the funding gap, we decided that Steve Robson should speak to ICL
today to communicate the following points:
- Ministers remained attracted to option B1 and the potential scope for
modernising government, provided it could be made affordable;
~ it was currently unaffordable;
~ Ministers would therefore like to explore further in the first instance with
the Post Office whether there were options that would bridge the
affordability gap under option BI by delivering additional revenues or
reducing the costs. This process is likely to take 2-3 weeks.
CONFIDENTIAL - COMMERCIAL,
5. This was clearly much less than Fujitsu were hoping for ahead of the Board
meeting tomorrow. ICL reacted calmly at the meeting with Steve. However, we
subsequently received indications that this might not be sufficient to persuade ICL.
to recommend to Fujitsu that they continue the project.
6. Inan effort to keep Fujitsu on board, Charlie and I therefore instructed
Steve to have a further conversation with ICL, and to offer two further
concessions:
= a cast iron guarantee that the Government would take a final decision
before 12 May when ICL are legally required to file their accounts with
Companies House;
- an offer to contribute towards ICL’s ongoing costs of continuing the
project pending a final decision by Ministers.
7. — ICL indicated that they took this as a clear sign of goodwill from the
Government, but emphasised that the final decision would be a matter for the
Fujitsu Board at their meeting tomorrow morning (UK time). We should know
their response soon after that.
8. We need to recognise that Fujitsu may decide these concessions are not
enough. In the event that Fujitsu decide to terminate - an eventuality which we
will do everything we reasonably can to prevent - the public sector parties would
need to respond robustly, not least to protect their legal position. I attach draft
lines to take, including a complete list of ICL/Fujitsu’s failures to meet their
contractual obligations on the Horizon project. All inquiries would be handled
centrally by the Treasury press office.
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