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JD
Secretary of State From: Sarah Graham, PFD Sp Proj
Date: 8 December 1998
cc: MOS
PSL
PSC(AE)
PSC(ST)
Special Advisor
Permanent Secretary
Peter Mathison, BA CE
Marilynne Morgan, Solicitor
Jonathan Tross, DCM
Paul Gray, PG
Pete Sharkey, ITSA/ACE
Stephen Hickey, PFD
George MeCorkell, BA Proj Dir
Martin Sixsmith, INF
Ron Powell, Sol Comms
Peter Crahan, CAPS
Craig Lewis, CAPS Govt Bus
PED Sp Proj Team
Hamish Sandison, Bird & Bird
File: MP8/Carbons
BA/POCL AUTOMATION PROJECT: PRESENTATION TO CST AND MINISTERIAL
COLLEAGUES
Issue: Briefing for the re-arranged presentation on an alternative option, should the
project fail.
Timing: For today, Tuesday 8 December 1998 at 2.30pm
Background
1. The presentation scheduled for last Thursday had to be cancelled because DTI Ministers were
unable to attend. However, the presentation was heard by the Chief Secretary who summed up by
saying:
e if there proved to be an acceptable way forward on Option 1, that is what Ministers
would be inclined to pursue;
e his personal view was that:
the Horizon programme was the wrong decision in the first place;
- there is a do-able alternative;
- the alternative we set out is certainly a better way forward for POCL in the
medium to long term.
However, Treasury officials’ subsequent advice was that CST would still prefer to find a way of
continuing the project, if at all possible.
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Briefing for the presentation itself
2. The purpose of the presentation is to provide the Chief Secretary and the Ministerial team
with an opportunity to:
e reassure themselves (we hope!) that there is a do-able option, should it not prove
possible to continue with the project;
e acknowledge that there is a challenge - to align the Post Office timetable for moving
to the installation of banking services with the potential timetable for achieving 100%
ACT-based benefit payments;
e assert our joint DTI/DSS intention to resolve this.
3. On the key issue of aligning the tension between the POCL/DSS preferred timetables for
moving to an ACT-based system, our concern is to demonstrate that we can move swiftly to an ACT-
based system; and that the pressure is for POCL to convince the Ministerial team why they cannot
move equally swiftly to a banking-based system. POCL have just commissioned some further work
on this from KPMG, which we understand they may claim demonstrates the difficulty of finding an
"interim" banking solution to match the DSS/BA potential timetable for moving to an ACT-based
system which fits with their longer term plans to introduce on-line banking facilities. Our view is that
the KPMG work simply endorses the view that POCL must talk to the Banks - and quickly - in order
to find a way forward. We would have little problem in agreeing to, say, a six month delay in our
programme, if that was in the greater interest of VFM/policy across Government eg. if Post Office
could thereby improve the prospects for protecting their network in the short term. But we would
not wish to agree to years and years delay - otherwise we are back at square 1.
4. T expect that Lord Falconer will probe the POCL banking timetable quite closely and you may
not need to do so yourself. But if he does not, it would obviously be helpful if you could ask, for
example:
e what work has been done to explore the possibilities of moving more swiftly to some
kind of banking facility in Post Offices in order to allow Government to achieve the
administrative savings from ACT payment methods as soon as possible?
e if the KPMG work looks negative in this regard, you may wish to probe alternatives;
e what discussions have POCL had with Banks/the retail sector?
e what consideration has been given to the advantages of moving early into the
emerging banking sector and the effects on new business/footfall for the Post Office?
e has any analysis been done of the effects of moving to banking early on the
commercial/social viability of individual Post Offices? For example, there is a
reasonable assumption that the installation of banking facilities may prove popular in
those very Post Offices which may be threatened under the current regime and which
people most want to stay open eg. in rural areas and out of town/non-High Street
areas: there could be advantages in Post Office introducing banking in those offices
as a priority.
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Other issues
5. Discussions with ICL: at the time of writing, there have been several meetings between
Adrian Montague, the public sector and ICL (since Stephen Byers’ letter giving them one last chance
to come up with an improved offer on continuing the project). At these meetings, the public sector
have been clarifying their views on the acceptance and funding proposals put forward by ICL so far,
to ensure that ICL understand our position and are under no illusions about what might/might not be
acceptable to us. There has also been a meeting between ICL and POCL about funding. So, far no
further proposal has been received from ICL but it appears that: a) they are still looking for a
relaxation in the public sector approach to “acceptance” which we cannot responsibly give; and b)
Fujitsu do not appear to be prepared to provide backing should the project fail at some later date for
whatever reason. We understand that Keith Todd is currently in Tokyo and we are anticipating that
ICL will come up with some sort of improved offer by 9 December; but on current information, it
looks unlikely to meet the public sector’s requirements.
6 Fujitsu involvement: you will be aware that Fujitsu have approached the British ambassador
in Tokyo, and have written to him the "standard" ICL letter - claiming they are "misunderstood"; that
the delays are the public sector’s fault; that DSS/BA are the true culprits, because they have never
wanted the project anyway; and have added a veiled threat about future wariness of backing PFI
projects. The Government advice to the Ambassador is to say nothing, and avoid getting drawn into
what could become negotiations. But DSS have advised that we cannot let the letter lie on the table
unchallenged. Some sort of reply needs to be sent, to protect our position should we come to
litigation with ICL. We are currently preparing a reply.
7. Legal Issues: there is continuing debate between POCL legal advisors and DSS/BA legal
advisors about the best way to terminate the project, should Ministers decide jointly to call a halt
following this latest round of discussions with ICL. Our advice allows us to terminate immediately
and thus to stop spending money on the project as soon as possible; whereas POCL advice involves
amuch more risky strategy whereby DSS/BA (and POCL) may well get drawn into significant further
expenditure on the project before termination, which could not be justified. As a result, the two
different views are currently referred to the Law Officers for their advice. It is important that the
Law Officers understand the Ministerial priorities involved, and I understand the HMT Legal Advisor
has alerted Lord Falconer. I have already alerted his office to the situation and our preferred
strategy, a copy of which is attached for interest. The Law Officers are now themselves taking
Counsel’s advice. We and others are seeing the Law Officers’ Counsel later today, to brief him.
Further briefing/update
8. I have asked your office to hold a brief slot in your diary today, so that I can update you if
necessary.
9. I hope this is helpful.
MRS SARAH GRAHAM
PFD Special Projects