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Notes on discussion on the Pathway project
(outside of the ICL PLC Board and Committee meetings)
13" May 1999
TKT A draft letter from Alan Milburn was received 1.00am, 36 hours ago
saying that despite the merits of B.1. the Government could not
justify (continuing with) it as it was poor value for money.
They would however like to go forward by buying (not under PFI)
the infrastructure and put in place an operating contract.
They propose to pay 50% of ICL’s audited cash costs to complete the
contract in 4 months.
Also there were merits in B.1. and they would like ICL to work
(in parallel) with POCL on the network — banking — modernising for
government in the future.
Stepping back on previous events, the previous deadline had passed
without the Government taking a decision by 23" April as promised.
ICL had told Steve Robson we could not continue and he requested
ICL to go on to 10" May, when a decision would be ready, with up to
£8m costs to be paid to ICL as an act of good faith. ICL agreed to
this.
No doubt the discussions were taking a considerable amount of
Ministers time as well as public servants time, and the time and
commitment of POCL, time of BA, DTI and the Treasury.
This matter affected the relationship of all the departments with the
Treasury. The final decision was necessary from the Prime Minister
and he did not have one recommendation, ICL believed, but a range
of options. Stephen Byers supported B.1.2. as did Lord Faulkener.
The negatives were Alistair Darling of the DSS who wanted to go
straight to ACT and the Treasury who had reverted to type and said
they were looking for value for money. In the hours before the
decision it was clear that the Post Office was not being aggressive
with its own business plan possibly because it believed that the
Government would come up with the extra money. However it was
also clear that a number of Government Ministers including the DTI
were concerned about the quality of Post Office management to carry
out the plans in the business plan.
Regarding the draft letter - there is now, for the first time a clear
statement that they want the infrastructure i.e. the Post Office
network and the recommendation that HORIZON needs to continue.
HMG therefore wants to buy the (whole) infrastructure that ICL
Pathway is putting in.
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However the draft letter is unacceptable and we have said no to it.
It is silent on the commercial terms. If we cannot get a financial deal
this week or next week we will not get a deal that is acceptable. Any
deal likely to be arrived at after this week/next week, when pressure
is off, will give ICL a loss in future.
Yesterday, Wednesday, ICL met Byers and Robson during the
afternoon having met Robson earlier in the day. Our initial approach
had been cold and silent and listening. We tried to understand how
the dynamic concerning how the Government was thinking, was
working. Last night (Wednesday) we took a firm line and set in
motion and series of activities (after talking with Fujitsu).
Mr Sekizawa and Mr Naruto would stay over. Steven Byers had
been told this and not told that the Board meeting was today. Robson
was asked to arrange meetings with Ministers Friday.
Robson was also reminded that the letter in draft from Alan Milburn
was silent on the Payments Card (on Monday ICL will begin roll out
of a further 100 Post Offices which will be card enabled shortly
afterwards). If this is not to proceed it should stop now. However,
we think the Government wants a “without prejudice” stop on the
card. Keith said no to this.
On our view of the financial dynamic we were clear ICL would not
take a large loss and be a scapegoat for the public criticism of the
project, which results mainly from Government delays. Keith was
taking a firm line on this. The Treasury view was that in future the
Post Office would take the deal to buy the infrastructure etc and pay
the redundant costs especially on the card. This gets back to the seat
of the original problem under the Conservative Government when
they said the DSS had to take the payment card not ACT. The DSS
have consistently undermined the project since then because they did
not want the payment card option.
ICL did not expect the present draft proposal from the Government to
work with the Post Office paying the redundant costs because
it would be uneconomic and an outcry would come from the Post
Office. All concerned need to understand the value of the network
the Post Office is to buy and the Government must arrange some
other method of funding of the rest of the redundant cost. ICL to see
Steve Robson again at 5 o’clock today, Thursday.
At the meeting last night Robson did not reject the possibility the
Government will pay some of the redundant cost and did not say they
would not pay all. ICL thinks the Prime Minister wants a national
network for the Post Office and we won’t have a better time than now
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to get money out of the Government for this and for the redundant
cost. Keith believes this is not an unreasonable approach. We have
been very much abused. We can achieve this but we must have very
significant pressure on the Government.
The Government is aware of the Fujitsu position and they want
Fujitsu as a large inward investor in the UK. We have advised that
Mr Sekizawa and Mr Naruto will want an audience with the Prime
Minster to confirm a way to proceed, not to negotiate.
On the legal front, we have for 3 or 4 weeks taken legal steps to put
the customers on notice they are in breach of contract. We need a
legal basis of stopping the contract should we choose. Rather than
we stop work and we cause the breach.
On the press, so far we have chosen not to use the press and wide
press coverage could be painful for the Government. Keith thought
we would stay our hand on the press for the moment because we
could not of course be sure of a good outcome.
There would be interest in taking up the ICL Pathway case amongst
opposition politicians for example Select Committee heads.
This also on hold for the time being.
The letter we have sent to Steve Robson needs an answer, a
resolution. Richard Christou is drafting the letter we want to receive.
This will be a short letter which could later have many schedules of
details but would be a legally binding heads of agreement. We have
pointed out our Friday night/Monday deadline that Fujitsu has given
ICL regarding the Fujitsu Group accounts figures.
All efforts Richard and Fujitsu were putting in would lead to a
meeting between 12 and 3pm tomorrow Friday, to put pressure on
closing the arguments in the next 24 hours. We have to have ready a
contingency plan if that does not happen.
If the result was not satisfactory, the first escalation would be on
Monday morning when we would stop work on the magnetic card
part of the project. We could take the view that money of the
taxpayers and ICL Pathway were being wasted. In parallel we were
considering a press release and public statement.
Mr Naruto: Emphasised cost of continuing work including the cost of the card.
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TKT The total financial costs so far of the Pathway project have been
£300m and then there would be shut down costs above this.
He believed the redundant costs would be £180m including the cost
to stop the magnetic stripe card — this was higher than the original
£80m — this was real cost not revenue foregone.
S Gillibrand So the Milburn letter cost implication was £180m — unnecessary
costs and the Post Office would acquire the system plus take out a
service contract?
V Davignon The financial aspects would be supported by the accounts of ICL and
Pathway in understated fashion — i.e. they could be audited and
reviewed to back up the costs incurred. We needed to establish
complete and full costs but costs which would not be argued with.
TKT Total costs to finish the project including redundant costs would be
around £700m. Ongoing service support would rise over time
peaking at £80m per year.
A policy decision was needed on what to charge; the submission to
the Post Office and Government would be on the basis of 15% profit
on design/development no profit on redundant costs and 10% profit
on operating systems. This was the basis of the compensation claim.
Richard would say this would be a tough negotiation. Although
Steve Robson had been friendly to ICL we would have to fight hard
and ensure ICL did not take a loss. Richard might say the bottom
line would be to get out at cost with future opportunities leading to
profit and this could be sufficient. But Keith thinks we could get out
of this with profit because the Government wants the Post Office
network and needs (SG) to put forward “the image of good
Government”. Byers does understand ICL is to be floated and the
Government wants this to happen. A loss on Pathway will not help
and they know this but our job will be tough to come out with a
profit. We have to be prepared they will play tough.
Keith’s position was now that on Monday we would ask for a
termination payment on the card and continue on the roll-out if terms
could be agreed. We would privately say to the Government we were
prepared to stop if not resolved by next Friday. The Fujitsu accounts
will go public on the 26" and we should prepare a public statement to
make at the time of the Fujitsu results. Keith thought we could allow
the Government between Monday and Friday to get things in place
and that there would be a press conference on Friday with Byers and
John Roberts and Keith confirming, if all went well before Friday
that we have stopped the card and would continue with the network
as in the draft Milburn letter, Alternatively if we did not resolve
matters with the Government there could be a briefing from ICL that
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we have stopped work on the Payment Card and are looking for
compensation (and might be prepared to go on with the rest of the
network if terms could still be agreed).
S Gillibrand —_ Does our legal position fit logically with stopping the card and going
on with the network, is it not inconsistent?
VDavignon _The longer we go on, on the basis that we think we can negotiate
continuing with the network and only stop the card might weaken our
legal case. We are simply reacting not following up our legal case.
TKT We will not take this proposed course if it will weaken our legal
position.
There has to be a decision from the company not just a reaction.
We have to be careful because of cost and effect on our employees.
Mr Naruto We should ask the Government do they want a magnetic card system,
ask them specifically and their responsibility would be to answer and
if they said no we could stop.
Sir Michael As Keith said next week seemed to be crucial to either settle or break
Butler the relationship — there is always such an optimum moment.
The Government put us in a difficult position and made us live a lie.
They decided in January they did not want to use the magnetic stripe
payments card. Probably we could subpoena the Minutes of
meetings which cover this. They did not come clean about this
because if they had they would have to pay all the redundant costs.
John Bennett’s team had been working successfully for 4 months on
a programme which they had already decided they did not need at a
cost of around £50m for the taxpayer.
He thought it logical to stop work on the part relating to the payments
card on Monday if we have to. This would be best. The letter we
should draft for the Government to send to us should include
cancelling the payments card and they could not deny this. But the
legal and tactical situation on Monday would mean we could be quite
strong. The last thing they would want would be Keith and Michael
Butler to explain to the newspapers what had been going on in the
last six months. We could produce an impressive chronology of
devious behaviour by the Benefits Agency. We can explain the facts
and why we are stopping work if we went to a total cancellation. We
can win the propaganda battle and the legal battle. We can put
effective pressure on the Government over the next few days. We
should put the Government under heavy pressure to reach a
settlement — that they will accept — otherwise they are wasting £300m
of Government money. Keith’s plan is best in present circumstances.
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Sir Peter 1. Approach of talking to the Prime Minister and officials being
arranged by Keith and Mr Sekizawa — we have to do this.
2. We have to continue to work on the legal options.
3. Regarding press and politicians he does not feel we should go to
politicians. The press environment is difficult. The background
is, they believe that all big IT projects are difficult and late etc.
Their and the public view is quite likely to be that ICL had wasted
its money and the project was late so it was our own fault. Like
the CAA project, 2% years late. The natural inclination is that the
supplier got it late. So press pressure can go in either direction.
He thought the articles in the press so far on the possible
cancellation had been reasonably balanced and had shown the
project was although late, being successful. It was not clear who
was leaking. We had to be very careful about putting pressure on
the Government at this point in time.
There were two points to resolve:
1. What Fujitsu will say publicly in its accounts but Fujitsu can
decide this in its time scale.
2. Whether to go ahead with the network and stop the card now as
Keith was suggesting OR stop now in total and sue them. None of
the discussions with Government so far had really produced
anything so why could we conclude a successful deal by
continuing with the network?
TKT Steve Robson had given indications of the Government’s good faith
on this and said ministers had been up to 12.30 am to try and find a
way forward. Now at last five ministers were aligned on the project
outline as in the draft Milburn letter (but they were not necessarily
aligned on how to pay for it). The advantage of the proposal would
be to cut the Post Office and DSS apart and hopefully get out of the
cash issue. It would lower the risk for ICL, be more realistic and we
could look at future possibilities later. Keith said we have faith that
we can fix the project if the Government go ahead, i.e. we have time.
We cannot go to a flotation next year without the situation being
clear.
Mr Sekizawa_ As I explained the timing to Keith, Fujitsu’s perspective is the
announcement on 26" May but for Fujitsu internally next Monday is
the date for the figures and when Fujitsu directors will gather to
decide the figures which will be announced. By that time if the
Government has not signed up and ICL make a big loss there will be
a big effect in the Fujitsu accounts.
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26" May after the press conference there will be economists and
analysts listening and we need to work out what to say to them when
they question why there is such a big ICL deficit coming through in
the Fujitsu accounts. We need to understand how much Fujitsu can
talk frankly. This is a point we would have to put to the Prime
Minister if we can see him. However if the details that Fujitsu can
put in its announcement is not a strong blow to Government, there is
no point in me meeting the Prime Minister. But if it is leverage I will
meet him. So we need to come up with a draft of what I should say.
V Davignon Has the same feeling as PLB on the press. It will emerge piecemeal.
He is reluctant. At best the press will be even-handed, they will
blame everyone and take the view that virtue is with them.
He referred to the issue of what we and Fujitsu say on 26" May.
If we say that we are not happy but discussions continue we can lose
leverage and damage our credibility for the future. So if before
26" May the Government has not come up with something acceptable
to us then we need to say to the Government that we had confidence
in them, we showed trust in them which was not reciprocated for
9 months. We trusted your modemising Government agenda.
You have let us down.
But today/tomorrow we should say to them we hope our trust is not
misplaced.
We seem to have had a good legal case for a long time now and have
no choice but to consider breach of contract etc on the 25" and
possibly earlier. Depending on how things go we must raise it with
the Government.
We must say this matter will have influence on the flotation of ICL.
If this causes problems on flotation it will be the Government’s
responsibility. We should say this to them earlier so they will not get
a surprise on the 25"
Ifa settlement is yoing to be found, they must make a proposal to us
they must not ask us to give them another suggestion. They must
take the responsibility for suppressing the card and thus have to meet
the cost of cancelling.
We must say to the Government they have to pay what the Post
Office cannot justify paying. The Post Office must pay what makes
sense to them as an investment.
He sees difficulty with the situation we will have on Monday (if we
are offering to go on with the network and stop only the card).
He believes we have now got to the situation that all cards should be
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on the table and the bottom line position has to be given to the
Government — if not we are in a very difficult situation.
TKT This is all helpful — we need to be mindful of the Fujitsu accounts
deadline we may have between Monday and Friday to arrive at a
solution.
V Davignon Advised that we could not go to the Government on Friday wanting
an answer by Monday, next Friday would be a much better
proposition. An approach asking for an answer on Monday would
immediately put the Government on the defensive.
TKT There seemed to be two options:
1. To be prepared to stop now, this has two sub conditions:
a) to try to get what we want
b) to be prepared to stop and fight in the Courts
2. We need to decide with the auditors whether to take a provision in
the ICL accounts and carry on negotiating.
We need to bring this to a quick conclusion even if it means we have
to fight.
Sir Peter It looks like we will need a provision and have to consider this
carefully. Regarding stopping the project, his gut feel was that we
stop in total not a half stop with the network piece continuing and the
magnetic stripe card terminating. We need to follow up the legal
option or the Government must give us something which is a basis
for going forward. We need definite figures for the ICL accounts and
there is not enough time to do this, to meet the Fujitsu accounts
timetable.
Mr Naruto A good aspect of this is that this is the end of the PFI this was the
good part of the Milburn letter. Regarding the future with POCL, we
should stop for the time being and prepare the price and sct a
deadline then be prepared to work jointly with POCL in the future.
S$ Gillibrand —_ Are we quite sure of the strength of our case? Did the Prime Minister
to MB know the strength of our case when he saw Mr Naruto and ICL
previously. Sir Michael replied that when the Treasury panel
reported there was no serious criticism of the system and a lot of
journalists etc had seen it and were happy with it. Also John
Bennett’s team had been sticking to its recent plans successfully
despite the Benefits Agency attempts to obstruct. So far we have not
spoken to the press, so far we have not explained our side of the
situation. It may be that Ministers have not been advised fully on the
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strength of our case? The Benefits Agency lawyers will have been
blaming ICL Pathway.
S$ Gillibrand —_Do we get anything out of getting the press to help us. We have to
take the high ground with the press and be confident.
TKT The legal case strengthens by the day — for example their agreement
to pay £8m. We have a long list of points. Robson has said the
contract would be a nightmare to terminate — in his mind he sees it as
anightmare! We have lived through this internally for 3 years.
Sir Peter We need to take a view on the provision in the accounts.
V Davignon It is important we bring it to a head, we have a legal obligation to the
shareholder.
Sir Peter We can declare it and take a provision — we cannot go on wasting our
assets, we know what we have to do. He remains concerned with the
press, we need to stay on the moral high ground, easier to defend in
the press if it comes up and better not put a gun to the Government’s
head through the press.
TKT Richard is working on a letter now and we are arranging meetings for
Mr Sekizawa and Mr Naruto but they are not set, hopefully, they will
be on Friday between 12 and 3pm.
V Davignon Also important that we have a note of the points to be put at this
meeting with hopefully the Prime Minister or with Byers so that
people not at the meeting can see it.
TKT George Hall and Keith will draft and discuss this with Mr Sekizawa
in the morning.
The question was raised of the cost difference between stopping the
card now and at the end of next week. Then it seemed that working
towards a Friday the 21" deadline was better. We have created a
pressure point for next Friday and with Mr Sekizawa will be able to
put this over.
Mr Sekizawa If the UK papers came out with the story before Fujitsu announces
results in Japan e.g. through an ICL press release disclosing a
complaint with the Government this will then of course hit the
Japanese press immediately that ICL will have a big deficit in its
accounts and Fujitsu will be in a position that, if it did not, then it
should have, disclosed the risk in its announcement.
Secondly, although Fujitsu’s time scale is a results announcement on
the 26” internally the figures should be put together on Monday 17"
there are procedures we need to follow. We must work with our
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auditors so we need the ICL figures quickly. However I will check if
our deadline can be relaxed from the 17". I will speak to Mr Todd
and Mr Naruto about this. (Subsequently some extra time was
confirmed — to close of play on 19" May).
V Davignon If we do not have a satisfactory agreement we have to decide what
the provision will be. He took the view that many companies have
litigation and if we are comfortable we will be paid then this should
not necessarily mean a provision of any level. It is a matter of
disclosure. It may be we therefore do not have to take a provision if
we are confident we will get paid.
Sir Peter 17" May is a very short timescale, do we go to the Government to put
a gun to their head and say how urgent it is for us. Do we explain we
have the high ground and say over to you regarding our timescale.
Regarding the figures, this is an important issue for Fujitsu and they
have to assess it with their auditors. Then after Fujitsu and its
auditors have done so ICL should decide what its provision should be
(? is it a provision or no provision but just disclosure of uncertainty
etc).
TKT PWC our auditors are not prepared to go with no provision.
S$ Gillibrand _ If it is going to the Court it may be we do not need a provision but
Fujitsu need to consider their provision.
VDavignon _ His experience with auditors is to discuss the risk and explain it to
them but based on the possibility of recovery it may not be necessary
to take a provision.
Sir Peter Should we request the auditors sign up for 25" May then we go
public. If we are forced to take a provision at around £200m this will
be severe on ICL. Fujitsu can choose or not choose whether to make
a provision and declare the risk for their announcement. For our
accounts are we in a different position, do we have more time.
TKT We are in some ways de-coupled from Fujitsu but we need to check
with their auditors, we could be included as a material subsidiary,
(so their announcement may have to reflect exactly what we do).
Mr Naruto This is an ICL and Fujitsu matter not relevant to Government.
Wehave to say something to the press but on litigation the
Government may not be afraid - they can take a long time. Our only
leverage is to abandon the infrastructure of this project and they have
no hope for the future of POCL.
Sir Peter If the auditors sign off the provision we have to understand how this
affects the bank exposures and our trading position. The Board are
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ready to terminate - we need at some stage to check the auditors
position.
TKT The auditors were happy with the B.1.2. situation they have not seen
the latest scenario. The question arises what the auditors would do if
we believed the situation could be recovered.
Keith described the banking situation and Fujitsu guarantee for
£173m and the effect of a provision on ICL’s balance sheet. Also the
question arose of whether further Fujitsu support might be needed.
At what point would a material change under the Facility Agreement
have to be reported to the banks? We needed a contingency plan
with the banks when we go public. A key trigger is the size of the
provision, and the line the auditors will take.
Mr Naruto Emphasised stopping the PFI project.
Mr Sekizawa, Mr Naruto and Keith would plan for the meetings
tomorrow.
Sir Peter Talked again and there was further discussion about the accounts and
auditors. And there was discussion on how we got to £132m as a
provision level for the Pathway Limited accounts. If there became
certainty of legal action this would be helpful in regard to deciding
what needed to be shown in the ICL accounts. Intermediate
situations concerning provisions, uncertainty, qualifications etc were
possible. Vicomte Davignon emphasised it was not exclusively an
accounting debate but a fundamental issue, we might be deciding in a
range between a clean bill of health and a qualified opinion.
Mr Owen mentioned provisions were arrived at on the balance of
probabilities.
TKT would work on the negative scenario in the event the matter was
unresolved.
If we took a provision we did have to be careful. Generally we did
not want to qualify the accounts. The necessary back up from Fujitsu
had to be in place before we could sign off.
RFS
14" May 1999
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