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ICL PLC
BOARD MEETING
PAPER BY J.H. BENNETT
ICL PATHWAY UPDATE
Current Negotiations with HMG
The ICL proposal submitted in December 1998 has not been progressed or
discussed since that date and we have now formally withdrawn it. This proposal
is known as Option A and although is acceptable to POCL and is technically
viable and can be delivered, has been totally rejected by BA. It is also what the
current contract calls for and therefore represents all the work being done at the
programme level between ICL, POCL and BA. This major disconnect is
beginning to cause severe operational problems with the programme, and clarity
as to the agreed way forward is therefore urgent.
In place of Option A, a new proposal has been worked up under
recommendations from HM Treasury which is known as Option B1.2 and is
today the only viable option being discussed short of contract cancellation.
The essential components of Option B1.2 are as follows:
a. The bespoke BA benefit payment card is cancelled together with all the
systems which support it.
b. In its place we provide for POCL a new system to deliver Post Office
Benefit Accounts, for receipt of all benefit payments to their respective
recipients. This will be supported by a POCL smartcard. Benefit
payments will still be made available through the Post Office on an
exclusive arrangement for the near future and will be collected through
this post office account. This new development will take at least two
years to bring into live operation.
c. In the meantime rollout of the POCL infrastructure will continue on the
current programme plans and this will support the early POCL services.
d. The new ingredient in this option is to support the increased
determination by HMG to progress their Modernising Government
initiatives as recorded in their recently published White Paper. A
national infrastructure, a fully automated post office and up to
15,000,000 citizens smartcards created through the new method of
paying benefits is seen across government as an essential launch platform
for their other government wide initiatives.
e. POCL will adopt their new strategy to implement a network banking
service providing front office banking for the major clearing banks, who
- in many parts of the country are seeking to shrink their own branch
networks but still provide access points in the community.
The critical issue with Option B1.2 is its cost to government and unless this can
be handled, then the threat of cancellation is large.
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2. Components of the Deal for Option B1.2
The essential components of the ICL proposition now with HMG is as follows:
i. The contract term is extended from 2005 to 2010.
ii. The contract is struck solely with POCL.
iii. BA will no longer be a party to the contractual arrangements.
iv. We have negotiated a partnership arrangement with POCL under Private
Public Partnership (PPP) terms which will oblige both parties to work
jointly to win new business in specific areas, particularly Modernising
Government where ICL will have preferred supplier status.
v. The commercial terms change the structure substantially away from a
transaction pricing basis with all the volume risks towards availability
fees which are effectively guaranteed payments for service provision.
We are proposing that this balance is shifted once the Modern
Government takeoff has been achieved and we are able therefore to take
a higher risk reward profile.
vi. We have incorporated compensation payments to ICL for the abortive
costs of HMG cancelling Option A and the follow through impact this
has on our subcontractor arrangements. These are asked for in a single
payment due in 1999.
vii. There are new timescales put together to establish the POCL smartcard
banking system and the design, development, build costs for this are on a
time and materials basis such that we can avoid the development risk on
the currently high level service description.
viii, We will work with POCL on an accelerated programme to win early
market share for Modernising Government services and will use the PPP
to ensure we have a strong seat at the table.
Overall we have attempted to produce a lower risk profile than with Option A,
particularly through time and material charging and availability fees and have at
the same time positioned ourselves in a risk reward environment to capitalise on
modernising government should this business take off as it could. Finally, we
have removed the destructive energies of BA from the contract and therefore
reduced the risk of them continuing to block progress on the ground.
3. Heads of Agreement
There are two Heads of Agreement which ICL need to be party to. The first is
between ourselves and POCL and the second is a tripartite Heads between
ourselves, POCL and BA which is needed to disentangle BA from the contract.
The most work and the most progress has been with the POCL Heads which
now stand at over 100 pages in length and contains substantial detail on most of
the key issues of moving forward. A lot of areas have been resolved and broad
agreement has been reached on most of the topics. Notwithstanding this, there
do remain a number of large issues still to be settled. Of particular importance is
an agreement on the fair value of the Pathway system on termination together
with the transfer of IPR on such an event. In addition from the POCL side, they
need an acceptable position on Fujitsu guarantees. No signature on the Heads is
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possible until these outstanding points are resolved. An Executive Summary on
these Heads of Agreement has been produced by Masons and is attached to this
Board Paper.
The tripartite Heads of Agreement between ICL, BA and POCL has made less
progress. There is a scoping document, there are points to discuss and
discussions are in hand to progress this. The key issue for ICL is that this Heads
must be subservient to the POCL Heads of Agreement and when signed must
withdraw all claims and remedies of all parties.
Although not visible to ICL, there is another important negotiation required
between POCL and BA in order for BA to fulfill their obligations to POCL in a
way which allows POCL to sign their Heads of Agreement with us. The
conditions here surround the work needed by BA to support Option B1.2 and the
conditions attached to this. POCL have been in discussion with BA recently and
are finding progress painful and slow.
All these documents need to be agreed before an individual one can be signed
and although we are continuing to press for such signature to be legally binding,
this is not something the sponsors have agreed to or wish to take place.
4. Financial Implications of Option B1.2
A summary of the financial position for ICL should Option B1.2 be accepted as
it stands is given in Appendix 2.
5. Ministerial Discussions
The most recent discussions between ICL and Ministers took place on 5" May
when Keith Todd, Richard Christou and George Hall had a meeting with
Stephen Byers DTI Secretary of State. At this meeting we underlined the basis
of the ICL proposal and more importantly the strength of the business case for
modernising government for both the Post Office, the DTI and for HMG at
large. The meeting was business like and supportive and we can expect DTI and
the Post Office to strongly support Option B1.2 and our proposals to deliver it.
On the evening of the 5" May there has been a joint meeting between Stephen
Byers, DTI, Alastair Darling, Secretary of State for DSS and Alan Milburn,
Chief Secretary of HM Treasury. This has been a follow up meeting from their
indecisive meeting of two weeks ago. We have been informed that the meeting
reached no decision, and that further work is being undertaken to consider if the
POCL business case is capable of improvement. Whereas all parties recognise
the deadline for a clear decision on this programme, it is still a possibility. that
further work will be needed in order for the ministers to make a final decision,
which could be into week beginning 10" May.
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6. Timescales for Resolution
HMG understands both at a senior official level and a ministerial level that ICL
and Fujitsu needs to resolve their end of year accounts during the week of the
10" May and this has to have audit approval. They know in addition that
Company’s House has written personally to the directors of the subsidiary
company ICL Pathway Ltd making it clear that as individuals, we are subject to
criminal proceedings if we fail to lodge the ICL Pathway accounts for 1997 by
12" May. There is no intention to be in breach of this regulation.
7. Programme Status
Whilst the above discussions and negotiations take place the programme has to
continue to operate to the contract which is essentially Option A. On this we
have made sound progress notwithstanding difficulties with BA and their
attempt to invoke further delay. All the 200 post offices running release 1c have
been successfully converted to NR2 which is running well in terms of the day to
day transaction operations. There are however, major problems with the cash
account balancing which takes place on a Wednesday evening and this has been
analysed as much more to do with business processes, business support and the
skill knowledge of subpostmasters, rather than structural issue with the Pathway
system. Nevertheless, it will require joint effort to straighten out.
On the weekend of the 8/9 May we plan to convert our data centres from
Release 1c to NR2 and the plans for this are all in place notwithstanding
attempts by BA to again delay this activity.
We are therefore close to beginning live trial and are now well into the
acceptance phase of the programme which we are determined to complete to
enable POCL infrastructure to rollout as planned starting in August of this year.
It is however absolutely essential that we resolve the conflict of delivering
Option A on the ground when it has been rejected politically. The management
tasks of directing and motivation our own staff and controlling the activities of
our subcontractors is becoming more and more untenable by the day.
J.H. Bennett
6.5.99
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Pathway Current Business Plans
Introduction
‘The financial outlook for the Pathway project has been extensively reworked to reflect the latest
business and technical solutions, ICL’s commercial offer to HMG and the Heads of Agreement in late
stages of drafting with the Post Office.
Revenue
The forecast of revenue breakdown is as follows:
£M
Universal banking (BA related) 419
Network banking 100
Government Gateway & Smart card 814
Availablity fee 425
Other POCL client transactions 555
2313
Abortive work on Payment Card 50
Cancelled subcontracts (Payment Card) 30
Restructuring fee 100
180
Time and materials development work 100
Total 2593
It is assumed that the proposed one-off charges to HMG (the three items grouped above totalling
£180m) will be agreed unconditionally and that these will directly benefit cash flow.
Profit and Loss, and Cash Flow
Inclusion of Network Banking and Modern Government within contract scope, and the replacement of
the BA branded magnetic stripe card by a Post Office branded full function smart card as infrastructure
enabler, improves the financial outlook and reduces business risks relative to the Option A position of a
year ago.
Profit and maximum borrowing forecast are as follows:
£M
Lifetime project PBT at Pathway level 216
Lifetime project PBT at Group level 279
First year of profit release 2003
Maximum borrowing requirement 431
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MASONS’ WORK PRODUCT
STRICTLY PRIVATE & CONFIDENTIAL
SUBJECT TO LEGAL PROFESSIONAL PRIVILEGE,
HEADS OF AGREEMENT — EXECUTIVE SUMMARY
Heads of Agreement — Executive Summary
1. Introduction
1d This is a high-level summary of the draft Heads of Agreement between POCL,
ICL Pathway Limited and ICL Plc (“the Heads”) as at 5 May 1999. The Heads set out
the basis upon which the Pathway project is to continue.
12 The Heads will give effect to Option B1.2, as discussed with HM Treasury, which
envisages that the Benefit Payment Card and related services which were to be provided
to the DSS under the Related Agreements will be terminated and replaced with a new
Benefit Payment Service (“the BPS”). The BPS will include the operation by Pathway of
Post Office Accounts for those entitled to benefits, into which benefits will be paid by the
DSS via BACS. The Order Book Control Systems (the “OBCS”) will be retained as a
POCL service during the transition period of the BPS.
1.3 The DSS Agreement between ICL, DSS and POCL will be cancelled under a “Tripartite
Agreement” between ICL, DSS and POCL, which will also set out the basis of settlement
of all disputes between the parties to the Related Agreements.
14 A further agreement will enable Pathway to provide services to POCL in addition to those
contracted to be provided under the Related Agreements and to take advantage of the
opportunities arising out of the White Paper: Modernising Government (“the PPP
Heads”). The PPP Heads are in an agreed form annexed to the Heads and are to be
executed simultaneously.
1.5 Fujitsu is to provide a guarantee as to Pathway’s performance under the Heads and a legal
opinion as to the validity of that guarantee. ICL is to maintain the guarantee provided to
POCL under the Related Agreements.
2. Terms of the POCL Heads of Agreement
21 A number of Schedules to the Heads set out the principles for pricing, timetable,
acceptance, commercial issues and issues relating to termination.
2.2 Pricing
The impact of the new proposals on pricing, at the current stage of negotiations is set out
in the Business Plan.
2.3 Timetable
e Amongst other dates, for the Core System Release and the BPS Release respectively
15 November 1999 and 31 December 2002 are provided as final deadlines for
Acceptance, and national roll out is due to commence by 23 August 1999 and 1 July
2002.
24 Acceptance
© If Acceptance is not achieved by the required date, Pathway has a further 3 months
for each Acceptance Phase in which to remedy defaults. During this period POCL is
entitled to claim liquidated damages. If Acceptance is not achieved by the end of this
period, POCL is entitled to terminate the Updated POCL Agreement.
-1-
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e If the parties do not agree Acceptance Specifications or whether a fault is an
Acceptance Incident, the dispute is to be referred to a nominated external expert. The
expert’s decision is to be binding, save where vetoed by POCL on stated limited
grounds. In those circumstances POCL will pay Pathway the additional costs
associated with any extra work.
2.5 Commercial issues
e From 1 January 2006, Pathway may require counter equipment to be upgraded at
POCL’s cost, and before that time, by agreement (“Technology Refresh”).
POCL may elect to use third party suppliers to effect the refresh.
e This Schedule apportions the costs of site preparation and modification costs for roll
out between the parties. These costs were previously the subject of dispute.
2.6 Termination issues
This Schedule is complex and some important details are still to be negotiated. Points
already agreed:
e The parties will review the Related Agreements’ trigger events for termination to
ensure materiality and will clarify which breaches of service level will lead to an
entitlement to POCL to terminate.
e If POCL terminates OBCS, it shall pay Pathway the anticipated OBCS Scorecard
revenue subject to a number of discounts.
e Pathway is entitled to terminate for failure to pay £30 million or for an event of Force
Majeure (as defined).
e If POCL terminates for convenience or due to its Default, Pathway will receive a
compensation payment and will be required to transfer the hardware and software
(or rights to use software) of the Core System and the BPS (“the Project Assets”) to
POCL. The extent of this transfer is not yet agreed by the parties.
e For termination due to Pathway’s Default terms have yet to be agreed.
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