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FROM: Adrian Montague
DATE :
EXTN :
ROOM:
HARRY BUSH cc Adam Sharples, Oliver
Blake, Ross Newby
BA/POCL AUTOMATION PROJECT
1 This minute addresses three tssues what we should be doing to try to stabilise the Horizon
programme in the short term to prevent any further deterioration pending Ministers’ decisions,
whether there 1s any compromise between Option I and Option 2 which might command the
support of both BA and POCL, and who the troubleshooter might be
Short term stabilisation measures
2 Our fieedom for manoeuvre in the short term 1s quite limited We cannot implement any steps
which prejudge Mmusters’ decisions Even within this constraint, however, there are things we
should consider
. The Panel report has a list of actions which need to be completed by the end of July Some
of these presuppose ministerial decisions one way or the other, and will therefore have to
be put to one side for the time being (essentially those affecting the “strategic issues”), but
many of the actions relating to the critical or operational issues will adversely impact the
future timing of the programme if they are not pushed through on a timely basis We need
to fiogmarch the parties into resolving these issues To encourage them to do so, we
discussed a weekly forum to monitor progress This might meet faute de mene under our
chanmanship, and might be informed by a hands-on monitoring role on the part of PAL
have spoken to Peter Copping about this and he has sent in a proposal, which I attach
The price ts significant, and we need to consider whether the role represents value-for-
money
. Whatever the outcome, we will need more information regarding the build-up of ICL’s
costs PA do not have the skills required for this task, and it will be necessary to appoint
a firm of accountants for the purpose (possibly under the umbrella of the CCTA call-off
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arrangements to save ttme) The selected firm must have a forensic accounting capability,
a good knowledge of IT projects, and a familiarity with the PFI. Ross has made initial
enquiries through the CCTA which suggest that all the big firms regard themselves as
qualified to undertake the work, but there ts not one which believes it does not have a
conflict We are waiting for capability statements from the firms and can pursue this
further once they arrive Subject to finding a firm that can do the work, we need to get
cracking on the appointment as a better feel for ICL’s costs 1s going to be essential,
whatever the outcome
Is there a half-way house?
3 1 was mildly encouraged yesterday by the talk of finding an agreed outcome But it seems
cleat that BA will not accept Option 1, POCL and ICL are unlikely to accept Option 2, and no
one likes Option 3, except possibly the more impetuous at BA So, all in all, the chances of a
consensus look small Nonetheless, I think it may be worth considermg a half-way house between
Options I and 2
4 This involves recognising realities The first reality is that BA has the money, and its buy-in
1s essential It 1s also the party whose house technically 1s most obviously in order So any
solution we craft must command BA’s support
5 The next reality ts that, technically speaking, it is possible for POCL to have an agency banking
capability installed on the Horizon system from, say, 2001/2 It won't be in a position (probably)
to exploit as it will not, by then, have done the necessary deals with the banks and got its own
house in order, but no matter It 1s also clear that there 1s an unstoppable momentum towards the
payment of benefit through ACT, and only a Canute-like settlement would fail to recognise this,
and indeed facilitate it
6 The last reality we need to acknowledge ts that, however much BA may protest that they never
wanted the card and want to get rid of it now, the fact of the matter 1s that ICL have spent a great
deal of money developing the card, the card 1s a more efficient and economic system for direct
encashment than order books, and writing off the development expense will be costly and makes
Option 2 doubtful VFM
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7 To find a compromise way forward, I think it essential that we distinguish between technical
and financial considerations We should first identify what seems to us the optimal long-term
arrangement for the payment of benefit, and then consider whether there 1s a_ financial
accommodation available which might secure tt
8 I guess that, approached this way, there would be a broad consensus, probably including even
ICL, which would support an outcome which essentially relegated the card to a secondary
position, from quite close to the outset Under this approach BA would be bound to accept the
full functionality of the Horizon programme, but would be free from the start to plan an increasing
take-up of ACT-fed payments BA knows that ACT will take a while to ramp up, but they want
their way clear to move ahead with ACT So they should be free to promote increasing
penetration of ACT into the cash payment market, but only from the time when, on our best
technical advice, a properly resourced organisation in POCL’s position might objectively be
expected to have been able to deliver a banking platform - te around 2002 In return, BA must
accept that the card will have a long-term role in providing a means of benefit encashment for the
cash-minded and unbankable (if we assume that compulsion 1s not a short-term political option)
9 POCL cannot survive a move to ACT as early as this it will probably not be ready to compete
for BA’s ACT business by 2002, and it cannot support the reduction in income tt would sustain
if the payments to it from BA were reduced to take account of the volume of transactions “lost”
to ACT The second of these objections might be addressed if the guaranteed floor in the existing
arrangements with BA continued notwithstanding any move BA made to imcrease payment
through ACT To the extent that, as a result, BA would be paying twice for the same service, the
(beneficial) result would naturally be to drive BA closer to POCL as its preferred supplier of ACT-
based payments in ordet to be able to strike a deal with POCL under which ACT payments would
be credited agamst the floor in determining the overall level of payments to POCL = It might be
possible to encourage this process by ratcheting up the incentives on POCL to get ready for ACT
by applying a decremental quotient to the tariff of card-based payments, tn relation to that part of
the market agreed at the outset to represent the target level for ACT payment over the life of the
contracts, by including a tariff for ACT-based payments in the contract as part of the present
restructuring ptocess and by applying a reciprocal incremental quotient to those payments to
maintam POCL’s income at steady state assuming that it was able to secure BA’s target level of
ACT business
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10 There remains the issue of whether even these incentives would be powerful enough to get
POCL to deliver the necessary commercial arrangements with the banks by 2002 or thereabouts
This is bound to continue to be a worry My instinct 1s to tell POCL, as part of these
atrangements, that they must devolve the Horizon project into a separate subsidiary, allow ICL
to take an equity stake and then require both of them together to seek a strategic partner who will
help them commercialise the system as a whole
Il It 1s going to be necessary as part of a deal like this to give an extension of the present
contracts POCL will need longer-term support as an insurance policy if it loses a significant part
of BA’s ACT business, notwithstanding all the incentives built into the payment structure and the
support of a strategic partner [CL will need an extension, too, as the risk of a decline in volume
of transactions if POCL fails to get a good share of BA’s ACT business will directly affect the
returns it makes In addition, it will have unremunerated sunk costs and incremental investment
in the banking services platform which it will need to recover to as great an extent as possible
12. Even this approach may be too difficult to sell to the parties, but [ think it may be worth a try
It 1s the only way [ can see of creating a deal BA might possibly want, and this 1s going to be
essential if an agreed solution 1s going to have any chance of success If you and Adam think there
1s anything going for it, we should discuss how it could sold to BA who should be our first port
of call
Who should be the troubleshooter be?
13 I spoke to Steve Robson about the choice of troubleshooter His suggestion (which I am
ashamed not to have thought of for myself) 1s Graham Corbett, previously the CFO of Eurotunnel,
and a Vice-Chairman of the MMC_ Graham has an accountancy background - he was head of
KPMG’s European practices before joining ET - and has both the knowledge of big projects
(although not, so far as I know, in the IT field) and the force of character and stature to knock
heads together if the parties are unable to hammer out a detailed commercial solution for
themselves once Ministers have signposted the general direction they want to take Should I ask
him to come and see us? - although it may be easter for us to visit him as he 1s a polto victim and
not very mobile
Adrian Montague
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