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RESTRICTED - MANAGEMENT & COMMERCIAL arly .
1. Permanent Secretary — as From: Peter Mathison CE/BA
discussed
2. Secretary of State Date: 28 June 1999
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Copies: Ministers 2
Jonathan Tross DCM
Paul Gray PG
Marilynne Morgan Sol
George McCorkell CE/ITSA
Stephen Hickey PFD
Robert Devereux FSD
Sarah Graham PFD Sp Proj
Vince Gaskell BA Proj Dir
John Codling BA Fin
Ron Powell Sol
Pat Kelsey BA Contracts
Laurie Cairns PFD Sp Proj
Special Adviser 20
Ref: App/dune99/doc/MathisonSub.doc
FILE REF: FMP 3C
BA/POCL AUTOMATION PROJECT: FORMAL LAPSE OF TEMPORARY
DIRECTIONS
Issues:
Timing:
i) formally winding up the arrangements whereby I
requested you to issue me with a temporary Direction to
continue with the DSS/BA work on the project, for as long
as the discussions between the parties to the contracts,
commissioned by Ministers, continued; (copy attached);
(ii) explaining why no further Direction is now necessary; and
(iii) seeking your confirmation that you are content with the
position (para 9).
Current, to inform:
- our input to the NAO enquiry into the project which is
now underway; and also,
- briefing for the enquiry on BA/POCL recently instigated
by the Trade & Industry Committee, before which you
have been invited to appear (possibly in week commencing
5 July).
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Background:
1.
You will recall that on 30 July 1998, you directed me to continue to
authorise work to carry forward the development and delivery of the
BA/POCL joint automation project, and specifically the Benefit Payment
Card element of it, to allow you and your Ministerial colleagues the time you
required to take an agreed Government view of the best route forward on the
project, given the significant and continuing delays. This against the
background that ICL Pathway had been placed in breach of contract by the
public sector parties for failure to meet a key operational milestone in
November 1997; and that DSS/BA, having subsequently issued a notice of
“cure” which expired on 12 August 1998, from that date onwards were in a
position where I could have taken steps to terminate the contract and claim
damages from ICL for costs suffered by the Department due to the delays.
Under the terms of the contract, these would have represented a share of the
£200m which both public sector parties were contractually able to claim for
ICL Pathway’s failure to deliver. The actual (administration) costs to the
Department of the delays at that stage were relatively small, given that under
the terms of the PFI contract it was ICL Pathway who were responsible for
meeting the development costs. However, for each year’s delay that the
programme was not delivered to plan, there would have been losses incurred
through the fraud (programme) savings foregone - in the region of £100m a
year.
You issued me with a further direction on 15 September 1998, because you
and your colleagues had decided to commission some further work on the
future of the contracts, and discussions between the three parties to
determine if there was a commercially viable way forward which was also
acceptable to Government. The drafting of that direction was specifically
designed to provide me with the cover I required until such time as a
decision was reached. At that point, the Direction would lapse and I, in my
position of Chief Executive of the DSS Benefits Agency - and the
Permanent Secretary, as Accounting Officer for the Department’s overall
administration spending ~ would need to review the situation in the light of
the decision taken.
Current position:
3.
The decision you and Ministerial colleagues have agreed on the future of the
project, announced on 24 May 1999, essentially means that:
e the temporary direction with which you issued me on 15 September 1998
now lapses;
e given the nature of that decision, I do not require a fresh direction.
The decision you agreed collectively contains the following salient features:
e the project plans to automate Post Office Counters will continue, with the
aim of achieving automation of all offices by end 2001; BUT
Page 2 of 4
the Benefit Payment Card element of the project is to be concluded;
DSS Benefits Agency will cancel its contracts with ICL Pathway; and
amend its related contracts with POCL;
DSS/Benefits Agency will move to an ACT-based system of paying
benefits as the “norm”, starting in 2003 for completion over a two year
period by 2005;
by the same date (i.e. 2003), it is the intention that POCL will have in
place the necessary technology and commercial arrangements with banks,
that will mean that those people who wish to collect their benefit cash
from Post Offices should continue to be able to do so;
in the interim period, DSS/Benefits Agency intends to tackle the fraud
associated with paper-based methods of paying benefits, by extending the
use of bar coding Order Books (subject to reaching agreement on
commercial terms with POCL); or by similar measures.
From the DSS/Benefits Agency perspective, this means that:
we will not be incurring any future liability or expenditure on the Benefit
Payment Card;
we will only have paid the supplier for services actually provided;
we have a firm timetable for moving to ACT, making the benefit system
more secure against current Instrument of Payment fraud and allowing
reconciliation of benefit payment to individual transactions;
the project is thus considerably simplified and de-risked, so that future
plans to replace the current, insecure order book system are not wholly
dependent on the automation of the Post Office, and can be regarded as
that much more secure;
there are no costs to this Department for withdrawal from the Benefit
Payment Card element of the project, as such, or for payment of what
ICL might have claimed were abortive costs for its development;
although, as stated above, I could have claimed my share of damages that
might have been recoverable from ICL for failure to deliver, it is
acknowledged and legal advice was formally received to the effect that
the outcome of litigation is always messy, uncertain, and protracted,
whatever the rights of the case; and against that backdrop to be able to
withdraw from the Card with certainty; to have an alternative solution in
place - and at no additional cost to what has already been spent by the
Department - represents a prudent outcome for this Department’s use of
public funds.
Looking more widely than the narrow Departmental interests to which I am
bound to attend under the current accountability rules, I am also aware that
the basis on which Ministers took their final decision on the route forward
took into account a wider assessment of value for money and policy
considerations, including the impact on:
the 28 million people who use the Post Office network;
the role of the network itself in the social fabric of the community;
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e the individual business prospects of the 17,000 or so sub-post masters
who effectively own a significant share of the network;
e UK Plc; in particular the effect on ICL, as one of the major UK IT
players, and on its parent company Fujitsu; and on UK/Japanese
relations/inward investment.
Ministers also took care to the comparative costs of the policy options they
wished to achieve, but against a background where they were obliged to
terminate the contracts with ICL and pursue their objectives with another
partner. They were satisfied that this would have cost the tax payer more
than pursuing the route we have done which provides a final settlement of
the past and the future with ICL.
Conclusion:
8.
Against this background, I have discussed the current position with the
Permanent Secretary, and we are satisfied that neither she nor I need a
further direction to continue with the current re-shaped project and plans,
which involve continuing with paper-based methods of paying benefits until
2003. This can be justified in terms of:
¢ our intention to achieve near similar levels of fraud savings as would
have been achieved with the Benefit Payment Card by extending the
Order Book control system, or other measures;
¢ the earlier move now formally agreed to ACT than had hitherto been
firm; this will ensure:
- higher potential savings from cutting out fraud endemic in
paper-based methods;
: significantly larger administration savings than would have
been case under the Benefit Payment Card, for the
Government to redeploy elsewhere;
- the ability to reconcile individual benefit transactions;
* our withdrawal from any direct involvement in the POCL/ICL
automation programme, apart from the extension and roll-out of the
Order Book Control System.
Next steps:
9. If you are content, the Permanent Secretary will be writing to the
Comptroller & Auditor General to confirm the outcome; and to notify him
formally of the decision that has been taken and the position on the
Directions.
PETER MATHISON
CE BA
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eS)
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RESTRICTED - COMMERCIAL & POLICY
To: Secretary of State From: Sarah Graham PFD Sp Proj
Date: 20 May 1999 [Revised 21 May 1999]
Copies: MoS
Special Advisor
Rachel Lomax Permanent Secretary
Peter Mathison BA CE
Jonathan Tross DCM.
Paul Gray PG
Marilynne Morgan Sol
George McCorkell ITSA CE
Alexis Cleveland ACE/BA
Stephen Hickey PFD
Vince Gaskell BA Proj Dir
Carol Souter PFD2
Ron Powell Sol
Laurie Cairns PFD Spec Proj
Hamish Sandison Bird & Bird
BA/POCL AUTOMATION PROJECT: TOWARDS MINISTERIAL AGREED
DECISION
Issue: Agreement to move forward on a “deal” around option B3.
Timing: Immediate. The objective is to sign the necessary documentation with
ICL before 7.00 a.m. tomorrow morning.
Recommendation:
1. That you agree to the proposed “deal”: it meets your fundamental requirements that:
e¢ DSS move to ACT in 2003 and complete the process by 2005;
e that DSS are cut out of the funding “loop”.
Apps/Apr99/S0S-06.05.99
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The proposal also avoids the dependency on ICL/risk to us and the public sector of
the previous option to introduce special Post Office accounts through which benefits
would be paid (option B1); and arguably provides better prospects of certainty for
moving to ACT in parallel with Post Office provision of appropriate facilities by
2003, than the termination option - whereby Post Office would have to start their
automation process all over again.
Background:
3.
Issues:
4.
You will be aware that we have successfully brokered a deal with ICL around B3
which:
© costs the Government £10 million less than the estimated costs of terminating the
project; and thus meets the Prime Minister’s objective to find a way forward
defensible before the PAC;
© meets your and other Ministerial colleagues requirement that ICL will accept
liabilities/penalties linked with a fully working system (rather than simply
functionality at testing stage);
© overcomes ICL’s requirement (for auditing purposes) that the “deal” should be
unconditional, by acceding to their request, provided that satisfactory detailed
contractual terms can be agreed within three months;
e should ICL/POCL fail to reach satisfactory contractual arrangements during the
three month set period, there will be a termination settlement at POCL’s expense
(should they walk away) at a fixed price of £150 million: this represents a good
outcome for the Government - it provides ICL with some financial reassurance
for their auditors; at the same time, it provides much needed reassurance to
Government that, if the deal does not work out, there is a certain financial
outcome (as opposed to the uncertain and widely variable outcome on
termination, if a “deal” fell through, on a range of £0-350 million to
Government).
Our view is that this represents such a good deal for DSS that we do not wish to
find problems with it; or if there are problems, we wish to offer a way forward.
The key areas where there may be difficulties for us are as follows:
e we need POCL’s written consent to withdraw from the DSS/ICL related
agreement with ICL; this should not, in practice, be a problem because in the
past POCL have indicated that if Ministers’ decision was in favour of the DSS
withdrawing from the project, they would not object;
Apps! Apr99/S0S-06.05,99
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© we need to ensure that there is a firm commitment to move to ACT from April
2003; this appears to be covered in the briefing note that has been forwarded to
CST, but we may need to seek further formal reassurance;
e we need confirmation that the financial arrangements with POCL will be in line
with the planning assumptions (and costs) that have previously been provided to
HMT and used to model the cost of this option;
¢ there needs to be recognition that there will need to be a negotiated settlement
between DSS and POCL that may have a financial impact on POCL/the public
sector. For example we will need to agree a reasonable price with them for the
Order Book Control Service (OBCS) to ensure that it is affordable and that we
have a clear business case to justify it. In addition our costings supplied to
KPMG and we believe modelled by them, assume the removal of the “floor”
payments in 2003. If this is not included there will be additional significant
costs loaded on to the DSS in 2003-2005.
7. Against this background, I suggest that in your response to the Chief Secretary you
flag up our concerns on funding: my reading is that HMT will be looking to us to
absorb our extra costs given that we have done very well out of the “deal”. I have
discussed with my opposite number on the public expenditure team at HMT. And
the suggested line has been broadly agreed with him.
8. On a different issue, you will know that Stephen Byers/POCL are concerned about
the adverse effects “footfall” of this option, and were looking to us to provide some
reassurance on marketing of ACT prior to 2003. I suggest it would be helpful to
include such reassurance as we can give in your letter.
9. Happy to have a word if that would help.
MRS. SARAH GRAHAM
PFD Special Projects
Apps/Apr99/S0S-06.08.99
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RESTRICTED - COMMERCIAL & POLICY
DRAFT LETTER FROM THE SECRETARY OF STATE
TO CST
BA/POCL AUTOMATION PROJECT
1. I welcome the proposed way forward that has now been brokered with ICL.
It is pleasing that after much hard work and effort on the part of all those
concerned, we appear to have found a solution that gives the prospect of an
outcome to which all parties can commit.
2. As you appreciate, I am able to confirm my support for the proposed way
forward because it assures that we move to an ACT based method of
payment no later than 2003, completing this process by 2005. I should also
like to take this opportunity to confirm that our intention is to achieve this
transition with the help of the Post Office, with no prior marketing (unless
with their agreement); but on the understanding that they will in parallel and
by the same date have achieved suitable facilities to enable our benefit
recipients to collect their cash at Post Offices, albeit via ACT/bank accounts.
3. I should also like to take this opportunity to confirm the points I made in my
note to you last week, namely that the funding that I require to take forward
this option is not covered by the funding I inherited for this project, which
was based on completion by 2005 and the achievement of at least £100
million or so programme savings per annum from the end of last year. I
should also like to confirm that the funding requirements I set out in that
letter, and the estimated savings which could be used to off-set them are
based on the assumptions which your officials have been using for planning
purposes to estimate the costs of the various options. If those assumptions
change, for example because of changes in the level of funding falling on
DSS/BA as a result of the detailed contractual discussions, we will need to
revisit my funding requirements. You will appreciate, given the wider
context of the recent CSR discussions and agreement, that I cannot offer
anything further.
Alistair Darling
Secretary of State
App/May99/SoSDraftLenter-21.5.99.doc
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Far tates — Cd)
at
RESTRICTED - COMMERCIAL & POLICY
To: Rachel Lomax Permanent Secretary From: Sarah Graham PFD Spec Proj
Peter Mathison CE BA
Rod Clark PPS/SoS Date: 24 May 1999
Copies: All Ministers
Special Advisor
Jonathon Tross DCM
Paul Gray PG
e Marilynne Morgan Sol
George McCorkell
Stephen Hickey PFD
Vince Gaskell BA Proj Dir
Ron Powell Sol
John Bretherton INF
Laurie Cairns PFD Spec Proj
Chris Mann BA/CAPS
Hamish Sandison Bird & Bird
BA/POCL AUTOMATION PROJECT:
Headline News:
1. The deal around option B3 was eventually agreed at 3.00 a.m. this morning; the
formal signing is arranged for 11.00 a.m. today.
Next steps:
2. I will be putting round a fuller note in due course to record the agreement for the
record ~ and, for those of you with a masochistic sense of humour, some of the
details of the final toings and froings on Friday and over the weekend!
Summary assessment:
3. As you will be aware, the “deal” is a very good one for us, and gives us our main
objectives:
e an agreed move to ACT;
e removing DSS from the funding “loop” for taking forward the project;
and from a wider Government point of view:
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e significantly de-risks the project by scaling it down.
4. But, in contrast to the 1996 situation, it is now POCL who are the unwilling partner
in this “deal”, as we will need to be alert to this in our dealings with them:
* we need to be sensitive to their concerns in the welcome we give to the “deal”;
¢ in the longer term, and the next stages of the forthcoming negotiation, we will
need to help ensure that the “deal” does not in effect get unstitched, for
example, by POCL attempting to impose new conditions on ICL or
ourselves/the public sector that make the deal unworkable.
Immediate action required today:
5. Formal signing of the contracts at 11.00 a.m.: a legal undertaking was given on
our behalf by Hamish Sandison to the ICL lawyers at 2.00 a.m. this morning to the
effect that DSS BA would sign the letter withdrawing from the contracts we have
with them, as drafted and agreed with ICL last Friday, in the knowledge of what
had subsequently been agreed over the weekend. This undertaking was given on my
authority, having consulted Vince Gaskell and Hamish Sandison on the draft
agreement. The main developments over the weekend were in fact concerned with
POCL funding, and issues between HMT/DTI and the POCL Board. The only
direct issue of concern for us was the provision of an internal reassurance to the
POCL Board about the timetable for moving to an ACT method of payment as the
norm: I agreed with Steve Robson a form of words based on the reassurance
Secretary of State had already offered in his letter supporting the deal sent late last
Friday.
6. We will be looking over the final version of the ICL/POCL agreement first thing
this morning.
7. T have been assuming that Peter Mathison will now wish to sign the documents of
withdrawal. The signing procedure is arranged for 11.00 a.m. at Masons, the ICL
solicitors.
8. Announcement of the decision/setting off the DSS internal communication
strategy: DTI are in the lead on making the announcement and handling enquiries.
At 3.00 a.m., perhaps not surprisingly, it had not yet been decided exactly when the
announcement will take place. But DTI are aware of our view that the sooner we
make an announcement the better, from an internal communication point of view;
and they agree from their perspective also. As soon as I know the timing, I will let
you know.
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9. The announcement and briefing will be based on the drafts prepared by HMT on
Friday to which we actively contributed. We have not seen the final versions from
DTI; but I do not expect them to be substantively different. John Bretherton may
wish to liase with his opposite numbers at Treasury and DTI to make sure that we
are linked in at every level.
10. First order questions: I will be preparing a line for Secretary of State to take,
following the DTI/HMT agreed announcement and briefing, as soon as we have the
final version.
11. [Twill keep you in touch with further developments as they unfold.
MRS SARAH V GRAHAM
PFD Special Projects