CBOQ00100002_013
CBO00100002_013
Richard Christou Esq
BA/POCL AUTOMATION PROJECT;
Further to my letter of 23 April, [ am now in a position to let you know
Ministers’ decision on how to proceed with this project.
Ministers would like to take forward the project in two stages.
- in stage one, the POCL would, subject to agreeing acceptable terms,
contract for the supply of the Horizon automation platform, including the
EPOS and OBCS systems;
- in parallel with the roll out of stage one, POCL would develop a
detailed business plan, so as to establish how best to take forward their
long term network banking strategy. The results of this plan would
inform stage two of the project in which POCL would contract to procure
whatever additional functionality would be required to deliver this
business plan. We would expect this work to take approximately three
months.
STEVE ROBSON
CBO00100002_013
CBO00100002_013
RESTRICTED
From: Geoff Mulgan
Date: 10 May 1999
PRIME MINISTER ce Jeremy Heywood
David Miliband
Geoffrey Norris
Lord Falconer
HORIZON
1, There is now an impasse over how to proceed in relation to the Horizon
project, with a clear divide between Lord Falconer and Stephen Byers who
favour proceeding with a smart card system and Alan Milburn and Alastair
Darling who favour either a radically scaled down version of Horizon or
termination. A decision has to be made by tomorrow morning. The attached
notes from Alan Milburn sets out the positions. This note attempts to give you
a steer.
Background
2. You will recall that the policy objectives for this project were:
to protect the Post Office network
to protect ICL and our relationship with Fujitsu
to protect the Treasury public spending interest
to achieve a quick move to ACT
to achieve modernising government objectives
RESTRICTED
CBO00100002_013
CBO00100002_013
RESTRICTED
4
. The Treasury was tasked in December with developing an alternative to the
Benefit Payment card, but within the same overall costing envelope. Instead
the new proposal that has arisen from negotiations has turned out significantly
more expensive. We therefore have three options in play: a new smart card
based option (B1); a substantially scaled down version of Horizon, involving
ICL (B3); cancellation to be followed by a new contract (C).
. All involve very substantial costs - £400-500m over the next three years -
which will have to be covered by the Treasury. Short-term, cancellation is
the most expensive option, mainly because of the likely need to pay off ICL
so as to avoid litigation.
. In the longer term the smart card option, which also involves setting up
accounts for all benefit recipients, appears to be considerably more expensive
- £300-400m - than the others. However, there are significant doubts about
how reliable these figures are:
any delay in implementing ACT would substantially increase the cost of the
other options. For example if, in the event of cancellation, subpostmasters
were to be given an assurance that there would be no move to ACT until
2003, by which time they would have an alternative system in place, the extra
cost of B1 falls to £150-250m
B1 may bring much higher revenues than the others. The costings are based
on POCL’s estimate that new revenues deriving from the smart cards will
amount to £160m over ten years. ICL estimate these at more like £700m, and
RESTRICTED
CBO00100002_013
CBO00100002_013
RESTRICTED
ees
believe that a more commercially-minded Post Office would be more
optimistic. Much will depend on how quickly government implements the
various ‘modernising government’ proposals set out in the White Paper, such
as electronic vehicle license applications or change of address facilities.
while the costs and benefits of B1 depend on whether the flow of new
‘modernising government’ spending actually materialises, on the capacity of
POCL to use the technology well, and on the project not running into further
delays, the estimated c of the other options are even less certain - and
could be significant underestimates.
. On balance our judgement is that it would be wise to assume that there will be
a substantial additional cost with B1, probably between £100m and £300m,
even if the precise figure is unclear.
. The question which then follows is whether what this buys in terms of greater
security and stability for the Post Office network, and a vehicle for
modernising government, is worth the extra cost.
. Treasury, backed by DSS, judge that it is not. They strongly argue against
throwing good money after bad. They therefore favour B3 as the least worst
option. This is preferable to the government compared to cancellation, mainly
because it avoids having to pay off ICL. On paper it looks attractive, as a
lower risk, lower reward option. However the Post Office board are adamant
that they would prefer cancellation. It would therefore be necessary either to
give them a direction or to offer a big financial incentive, probably £100m.
RESTRICTED
CBOQ00100002_013
CBO00100002_013
RESTRICTED
BY
9. This table summarises the advantages and disadvantages of the three options:
Option I Cost ] Policy Risk
implications
I Bl: Horizon I Expensive I More policy ‘gain I Low I Would need to
plus smart twist GB arm
I cards to get HMT
agreement
B3: scaled I Cheaper Less gain Might need
down Horizon I I Byers to direct
Post Office
Board; might
in practice
C: termination I Cheaper Less gain poe I Higher short- I Strong chance I
lead to C
(though I term, though I of litigation
possibly I potential with ICL
I
I
I
I
I
I
expensive I advantage of a
I
I
short-term) I fresh start
RESTRICTED
CBO00100002_013
CBO00100002_013
RESTRICTED
10.The view of myself and Geoffrey Norris is that, despite its flaws, B1 is on
balance just preferable to the alternatives, since it better meets the main policy
objectives, avoids political turbulence, and may in the end not cost much more
than the alternatives. However, we would recommend that this should only
be agreed if the Post Office commit to make a greater contribution to the
costs, with at least an additional £100m to cover the funding gap (so far they
have promised another £37m).
.If B1 proves impossible, we agree with the Treasury that B3 is probably
preferable to termination. The government would then offer the Post Office a
choice between B3 and termination, either with a direction or some financial
sweeteners to encourage them to accept B3 (in our view a direction to impose
B3 on the Post Office Board would alienate the board and directly contradict
the government’s promise to give them greater commercial freedom). We
would probably then know within a few weeks whether B3 was viable.
12.There is a separate, but important issue, about whether Post Office
liberalisation should be delayed to help fund any of these options. Delay
would contribute an extra £190m in the first three years. The Treasury will
want to use this as an incentive for the Post Office to accept B3. There are
strong policy grounds for rejecting this, but it will be hard for No 10 to block
unless we can point to an alternative funding source.
RESTRICTED
CBO00100002_013
CBO00100002_013
RESTRICTED
is
Presentation
13.If B1 was to be agreed, it could be presented as a major step forward. The
government would be doing away with the failed Benefit Payment Card
favoured by Peter Lilley, and replacing it with a much more modern Smart
Card. It would be providing the basis for a much more aggressively
commercial Post Office strategy, and tackling financial exclusion by providing
all welfare claimants with a bank account.
14.If B3 or cancellation was agreed, it would be necessary to explain that the
Benefit Payment Card had failed, that ICL had failed to meet its deadlines,
that the costs had escalated out of control, and that government was putting in
place the resources for the Post Office to quickly develop an alternative
automation strategy, prior to any move to ACT.
15.What to do next? You have three options as to how to handle this deci
To make a judgement yourself on the basis of the admittedly imperfect
information at hand, and recognising that there is no objectively correct
answer
To call a meeting first thing tomorrow morning of the relevant ministers
(given the complexities involved this would not be a short meeting)
To nominate someone else to make the judgement on the government’s behalf
during the course of tomorrow morning
RESTRICTED