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COMMERCIAL & POLICY
FAX COVER SHEET
To: Ron Powell
FAX No:
Location:
No of pages (including this sheet): 16
From: Sarah Graham
Date: 19 April 1999
Phone:
Fax:
PED, Special Project
Room 535 North West
The Adelphi
1-11 John Adam Street
Londen
WC2N 6HT
Message:
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To: “Secretary of State . From: Sarah Graham PFD Sp Proj
; Date: 15 April 1999 (Revised 16 April)
+ Copies: Rachel Lomax, Perm Sec
‘Andrew Maugham, Sp Ad
Peter Mathison, BA/CE.
Marilynne’ Morgan, Sol
Stephen Hickey, PFD
Siice Gaskell, BA/Proj Dir
Ron Powell, Sol
Jtanish Sandison, Bird & Bird
BA/POCL AUTOMATION PROJECT: TOW RDS AN AGREED MINISTERIAL
ROUTE FORWARD
Issues:
@ Tapers you requested following yesterday’s discussion on the current position:
© a fuller description of the options B.1:2 and B3 - “the fourth way”;
« a brief account of the position on the project covering the state of the trials
and delays;
* a brief summary of the contractual prsition in relation to the current trials.
Gi) I Some additional commentary on the current position.
Note on the attached papers:
1, We have prepared the attached papers with an eye to the briefing you will need for
the meeting scheduled for lunchtime on Menday with your colleagues to decide how
best. to take the project forward.
2 You may also find it helpful to have in mind your and colleagues’ original
objectives for the Steve Robson Jed round of discussions, which can loosely be
. summarised as follows:
© ‘to drop the Benefit Payment Card;
© to move to ACT based payments as quickly as possible, in order ta achieve the
£400 million administration savings for Government to redirect;
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BA/POCL AUTOMATION PROJECT: TAKING FORWARD MINISTERS’
PREFERRED OPTION
_ OPTION B3/“THE FOURTH WAY”
1. This option is a late entrant, devised by DSS/BA a matter of days ago, when it
became apparent that the cost of the option being developed so far by Steve Robson
with ICL, POCL and ourselves (option B.1.2) was looking so expensive that it
could not be acceptable to Ministers.
“2. - Tcis an attempt to find a solution which:
© meets the objectives set by Ministers at the outset of this current round of
discussions, and provides something to which all three parties can commit;
e buys-the extra time needed to establish the best value solution for Government,
while giving ICL the financial reassurauce they need.
3. Because it has been put on the table at the last minute, little detailed work has been
possible so far. We are currently trying to engage with POCL to see if there are the
bare bones here of a solution that can meet Ministers’ objectives. So far they are -
unwilling to engage, But attempts re being made to get them to work on it, both by
Steve Robson and by Alaistair McDonald (the G2 at DTI).
4... Uncer this-option: :
e the Horizon project would be continued, but without the Benefit Payment Card
element; this means that the basic automation platform would be introduced
throughout the 19,000 Post Offices.in the network, along with the Electronic
Point of Sale System (EPOS), utility payments and services for other
Government departments;
© on the back of the roll-out of automation to all Post Offices, the current Order
Book Control System (OBCS) ~ bar-coding of Order Books to prevent
fraudulent practices - already included in the project and established in the 204
pilot offices - would be extended to give national coverage; this would give ICL.
around £40 million revenue from DSS; for this money, DSS would be buyixg
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roughly £80 million per annum programme savings though avoiding fraudulent
payments, on top of the £60 million the OBCS system is already saving us; and
would go 80% of the way to cutting out thé total estimated fraud endemic in the
paper-based methods;
e DSS would continue with the Order Book method of payment (albeit now
: protected by the OBCS system) until such time as Post Office were ready to
deliver cash via bank accounts, as Jong as this was no later than 2005 -the date
current contracts with POCL and ICL terminate;
e POCL to be given six months to settle its strategy for moving to banking
services in a way which would enable che collection of benefit cash from Post
Offices via bank accounts; options include moving straight to a “network”
banking solution (whereby POCL could bid for business to act as service
providers/agents for al! banks); or entering a strategic partnership with one or
more banks to open specially badged Post Office accounts with Smartcards;
s once POCL have decided their strategy, they would be given over two year: to
develop and put in place banking services which customers will want to use; this
could involve their ideas for network banking as well as becoming an operator
within “LINK” and therefore provide a rationalised and comprehensive UK cash
acquistion service for everyone it also allows a SMART card to.be introduced =~
for SMART services without any direct link to DSS payment activity;
© DSS would then and in liaison with POCL and the banking industry, be abl: to
market ACT as the norm for benefit payments against a background that
modernisation of such payments would be completed by 2005; once volumiary
levels of take-up of ACT have been established the DSS would, by open tender,
offer to procure services for the remainder, with POCL in a good position to
* win that business;
. © existing contracts between DSS/BA and POCL and Girobank for paper based
payments would remain, thus giving POCL a guaranteed level of income (period
to be negotiated) before the’ move to wholesale ACT. Once the move to POCL
banking services has begun it will be open to HMT to agree a funding
arrangement via DTI to supportt POCL’s overall service;
© by mid 200] there would no longer be a need for any direct contract between
DSS/BA and ICL Pathway; : .
Background:
5. The context to this option ~ in other words the reasons why B.1.2 is running into
. difficulty - is important: we need to address those difficulties as well as Ministers’
original objectives. Some of the key difficulties are:
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© any strategy that involves POCL entering into some commercial negotiation with
a bank or banks requires more time than the six weeks given by the Prime
Minister's timetable and the Fujitsu need to report to their Board on 23 April; if
we are to seek such a solution - which may well be the best for the Post Office’s
long term commercial viability and will secure best value for money therefore
for government '- we need to find a solution that can buy us more time, while
giving ICL some financial security and reassurance up front;
© the reason why Option B.1.2 is coming out very expensive is that it is essentially
the Benefit Payment Card project in technological design but with add-ons
» (SMARTCARD, “money box” accounts, a banking sub-contractor etc); and
without the savings to government that might accrue through:
- drawing in a bank to share in the investment costs of setting up a simple
banking system;
- the benefits that come to government from transferring the risk to banks; and
from minimising the development risk by “piggybacking” on existing and
generic systems;
- ICL appear to have added on “availability fee” to their proposal - in reality
to recover all their “abortive” investment to date. .
Assessment of the option:
6.
From a Government perspective, this option offers:
A. Advantages:
Allows both public sector parties to achieve their main objectives.
Gives potential to broker a way forward with ICL Pathway which gives them
enough to keep afloat financially and win their commitment.
¢ Avoids problems with the PAC about justification for high Government
expenditure on a failed PFI project.
“-e Gives the opportunity to direct Government funding to POCL in such a way that
it focuses on that part of the network Government-wishes to support {ie the
rural, outer-city and other isolated offices).
s Provides evidence of a joined-up approach to problem solving.
B. _ Disadvantages/risks:
- «All parties get less than their preferred solutions:
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~ POCL plans to enhance their existing “banking” business may fail; BUT
there is no option thar secures: a commercially viable furure for the Post .
Office;
- DSS/BA could in practice be made to continue with paper-based methods via
Post Offices for the foreseeable future; BUT, again this could happen under
any option, whatever theoretical: agreement is reached with Post Office about.
migrating to ACT; .
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- ICL could be left with a “break-even” situation, with little potential for
winning more business eg through working with POCL as an agent for
! © Lite that guarantees early implementation for the “Modernising Government”
agenda; BUT potential. .
7. > (An assessment of the advantages and disadvantages for the three parties - ICL,
‘ POCL and ourselves - is annexed.
SVG
PFD. bpecial Projects
15 April 1999
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ANNEX .
ASSESSMENT OF THE “FOURTH WAY” OPTION FOR THE THREE
1.
yay
PARTIES:
Advantages:
On commercials, provides a tangible financial package:
e a substantial income for the Horizon platform in the early years
and the real opportunity to partner POCL in the development of
its business; ‘
« an assured revenue stream (say £40 million p.a.) for providing the
OBCS service; _
« the prospect of any early and final settlement of current liabilities
to Government.
Retains some prospects of additional/longer-term business with
© in support of its banking strategy
and/or
® to support SMARTCARD, Government business
Simplifies the technological requirements (and issues) significantly.
Simplifies the existing tripartiate contractual relationship.
Supports ICL in working “with the grain” of Government/public
sector objectives.
Disadvantages:
1.
Cuts down ICL share in ~ and payback from - the project
significantly, compared with:
(a) __ their original vision of the project;
(b) their bid under option B1.2.
Commercials need to be fine-tuned to keep ICL a willing partner:
danger that litigation could look better for them commercially.
Advantages:
1.
2.
Gives them the earliest possible introduction of automation for their
network. . .
Gives them a further six month period to decide/more control over
the way in which they move towards providing a cash withdrawal
service linked to ACT/BACS, in a way which will fit with their
longer-term businétss and commercial strategy. :
In the interim before they move to this position they will continue to
receive guaranteed funding from DSS/BA (c£400 million a year).
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B, Disadvantages:
1. Will require POCL to move to a banking solution sooner than they
would have done under the BPC option/and lose guaranteed DSS
funding.
2. May risk losing benefit recipients’ “footfall” (through natural drift to
payment via ACT) the longer it takes to install suitable banking
payment arrangements.
Ways of: introducing/marketing a Post Office Smartcard would need
to be reconsidered.
4 They may not win the DSS open tender for payments to customers
who reject ACT.
w
For D
A. Advantages:
1. May achieve c£80 million fraud savings earlier than under other
ions (including BPC).
2. Opportunity to move to 100% payments via ACT/BACS earlier (and
certainly no later than) under BPC option (2005-2008); and achieve
the £400 million p.a. administration savings for Government to
redeploy.
3. Allows us to stop spending money on a product and a project we can
no longer justify: there will be no need for a formal direction to our
DSS Accounting Officers to continue funding the project; gets us
(and the Government) off the hook with the PAC.
4. Cuts-us out of the direct contractual relationship with ICL Pathway,
except on OBCS.
B. Disadvantages: . \
1. May have to wait longer than we need to move to/reach 100%
: payments via ACT if POCL need longer to develop banking
infrastructure (we could start in April 2001).
2. May be expected to find funding for settlement with ICL Pathway
around withdrawal. from our.contracts in the BPC.
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OPTION B1.2
Summary of Option
1. The Option consists of the use of a POCL Smart Card as the key for a customer to.access
-sitnple Post Office Accounts (the "moneybox" accaunt). The BA would pay benefits via ACT to
BACS as we do at present for those who currently receive their benefit by ACT.
2. The "money box” account wauld be a simple credit only, non-interest bearing account capable
of:
2 receiving benefit payments and certain other deposits in addition;
. being free of charge to customers;
. . allowing bill payments;
a offering benefit customers the opportunity to collect cash at Post Offices.
3. These accounts” do not in themselves provide the ability to migrate into “full” bank accounts. A
separate programmie is needed to achieve this; and POCL will need to adjust their banking
. _ Strategy accordingly.
4, {CL/Pathway would be responsible for:+
. delivery and operating the infrastructure making use of much of the existing Horizon
system developed by (CL/Pathway:-
- .the smartcard management system; ‘ ‘
: the administration of the accounts (but ICL would contract with a Bank to
delivery the latter);
. developing the link between the Horizon infrastructure and the Bank.
5. Under this option the Benefit Payment Card would be terminated and the BA would have no
contractual relationship with ICL, Payment Cards issued to the existing 35,000 customers with
the BPC would be withdrawn and order books maintained until the Smart Card systerm'is ready.
6. The Order Book Control Service (OBCS) currently only in operation in the 204 pilot offices
would be extended to the whole of the UK. This would involve the bar coding of all orderbooks
arid is likely to achieve up to 80% of paper based IOP losses.
Timeseales
7. POCL and ICL believe that the Introduction of these accounts and the implementation of the
Smart-Card could begin in the Summer of 2002. It would be at this point the migration to ACT
into these accounts would begin. Roll out should be completed by Summer of 2004.
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Costs
Based on the castings so far this option is significantly more expensive than the BPC
This is because of:-
+ the cost of the Smart Card;
® the cost of the banking partner;
of itIs essentially the BPC in design but with add-ons.
The additional costs take into account all the administration savings from ACT and are being. :
- Scrutinised further by KPMG and by DTI. .
Assessment of the Option
Many of the pros and cons of the Option are identical to those of Option B3 (the fourth way) and
__ are summarised in the previous Annex. The key differences to all parties are summarised
below. -
Foriet:
This is a better Option for ICL than 83 with no additional disadvantages to them over that
Option. ‘It is in effect the Benefit Payment Card (BPC) with extra business. The key additianal
advantages are that it:- :
e maximises the use of their existing infrastructure and software;
. gives stronger prospects of additional/ionger term businegs with POCL; and therefore
. offers much better prospects of improving their return on Investment
For POCL -
There are no additional advantages for POCL in this Option when compared with B3 (the “fourth
way’) but it has the following additional disadvantages:-
. the Post Office accounts will not of themselves be a stepping stone to bank accounts
and POCL will need to adjust their strategy for the introduction of banking services; in
effect it adds an extra (and costly) step in their strategy to move to providing banking
services;
. they may risk losing “footfall” if acbounts are much less attractive than other forms of
bank accounts;
‘ commits POCL to an open-endad relationship with ICL.
For pssiaa ‘
There are no additional advantages to the DSS/BA of this option over B3. However it has one
important disadvantage:- ' .
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. the risk of making the benefit payment business arguably even more dependent on
ICL systerns and for longer; ;
‘ the difflculty of presenting this changes as an advantage for heneflt recipients (unlike
B3, that could be presented as increasing choice of delivery location and services
available). *
For Government
“There are no additional advantages but there are some key disadvantages:
it Is more expensive than the BPC (because it is In effect the BPC with add ans)
and therefore potentially una¥fordable,
. does not overtly meet the Government's main policy agenda
to meet the Social Exclusion Unit's likely recommendation for Government/the
banking sector to encourage wider access for all to mainstream banking « and”
financial services;
- to meet the Modernising Government agenda.
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6.
’ BA/POCL Programme - Current Status
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This note provides a brief summary of progress on the current BA/POCL Programme
+ including:-
. recent diffleulties in testing the next {CL Pathway Software release
. preparations for the Live Trial for ICL’s product
There are differences of view between POCL and BA about the completeness of testing and.
the readiness for Live Trial that are also summarised in this note. Lote
Testing
Following technical testing of the latest ICL Software New Release 2 (or NR2) four separate
Model Office tnd end to end tests have been undertaken. Each of these tests have taken
approximately one month to complete. At the end of each run all significant incidents were ,
corrected and proved through "target" testing. In theory the next Model Office test should
have produced a relatively clean run. However, in practice, each of the subsequent Model
Office tests has raised as many new incidents as generated through the previous ruris.
initial test runs of the software should have been completed by mid December 1998, but.
because of the above prabiems testing was: halted for two months whilst ICL took steps to put
fight large numbers.of major faults. This was overseen by POCL. ,
As we entered the formal and what should have been the final Model Office run in Feb/March
we made it known to the Horizon team our considerable concerns about the creation of new
incidents and gave a view that it rnight be necessary to have an additional run of Model
Office. In the event a further 200+.new faults were identified. Some of these were critical
and would directly affect the correct or timeous payment of 1% of benefit payments in a Live
Environment. .
Further targeting testing has taken place to'fix all major faults identified but to date we have
_not seen a clean run of Model Office. Our definition of a clean run has been set atno -
incidents which would provide incorrect or delayed payments and only a modest number of
background system problems.
POCL have ‘ejected that view arguing that the targeted tests have dealt with all known faults,
further tests will be costly and will delay the start of the Live Trial and Nationa! Roll Out.
The BA view is that only with a further run of testing of the end to end system will give the
level of assurance needed that no major new faults will be uncovered because this could:-
. put benefit payments to 60,000 Child Benefit customers at risk during the Live Trial;
. put at risk the accurate payment of over £1m per week to those customers during
. the Trial Period; .
. puts at risk the successful completion of the Live Trial; or
. ‘create a situation in which we had to terminate the Project because of failures of
the software during the Live Trial that could have been identified earlier in testing.
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10.
11.
12,
13.
14.
* 15.
16.
“417.
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: The differences of view between POCL and BA remain with further discussions taking place
wy to reconcile the two views. In the mean time, rather than hold-up the Programme, ‘the
BA have agreed not to stand in the way of preparations for the Live Trial.
The next cruciat point In the Programme is on 9 May. By then we will have to have resolved
our differences, or found an alternative way forward or risk delaying the Live Trial.
Live Trial
I :
The Live Trial is due to begin on 10 May. This will involve the authorisation of a further 100
Post Offices bringing the total to 304. -It will also include the implementation of NR2 inte all
- 304 Post Offices involving approximately 60,000 Child Benefit customers receiving their
bénefit by card payment, 3
’ :
NR2 has new benefit payment functionality including most critically mechanisms for making
payments to customers in the event of systems failures. However the major new part of th
software provides Electronic Point of Sale facilities. .
The trial period is for 15 weeks when the software will be monitored closely. At the
conclusion of the trial period POCL and BA will need to decide whether to terminate the
Project or accept ICL's product and begin to roll it out to all 19,000 Post Offices and-all Child
Benefit customers not pald by ACT. Roll out is scheduled to begin at the end of August
1999.
A. meeting took place on 7 April to givé approvel to proceed to the Live Trial but 8A were
- unable to give approval in view of the current status of testing.
Ramifications of Not Proceeding to Live Trial
. "
. if BA continue to withhold approval to proceed the possible implications include:-
. delays to the Programme (at least 2 months on the start of the Live Trial and 6 i;
months delay to National Roll Out to avoid the periods over Christmas and the
Millennium);
7 further adverse publicity about.the Programme:
" lobbying from Sub Postmasters;
. Press speculation;
“ possible litigation by ICL.
i
Next Steps
ur legal and contractual position is set out in a separate memorandum from the joint
Programme Lawyer Hamish Sandison, [n the mean time further discussions with POCL are.
planned to see If we can resolve our differencas or whether we can obtain the assurance
about NR2 that we have been seeking.
We will report on the outcome of these discussions. In the meantime progress on the Project:
continues.
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