HMT00000030
HMT00000030
CG ce
BA/POCL - UPDATE FOR THE PRIME MINISTER
Since last week, we have been exploring with ICL whether we might find a way
forward for the Horizon project in which the Post Office would buy the basic
ICL hardware. This would provide automation at post office counters for
services like bill paying and postage rates, and a platform the Post Office could
build on to win business. The plan would be that the Benefits Agency would
use ACT to pay benefits into accounts in High Street banks. The Post Office
would offer cash back facilities based on access to these accounts. The
arrangements would provide a basis for network banking (under which the Post
Office would provide customer services for High Street banks). It could also
provide a smartcard for Modern Government services. The system would
provide a new capability to combat benefit fraud.
What progress have these discussions made?
Discussions with ICL have foundered on two fundamental issues:
First, contractual issues. Three key points here:
- ICL want unconditional agreement today. They say this is necessary if
they and Fujitsu are to avoid a provision in their accounts. But the
consequence of this is that, if unforeseen terms and conditions came up
in the substantial process of moving from the present outline agreement
to full contracts, the public sector would have no right to withdraw.
Entering a contract on this basis would be unusual and, if there proved to
be costly surprises, subject to criticism;
- ICL are not prepared to allow part of the contractual payment to be
dependent on the system performing satisfactorily when fully rolled out.
This means the Post Office could pay for a system whieh did not perform
as necessary;
HMT00000030
HMT00000030
- ICL are not prepared to give evidence of ownership of the assets
involved, or to give perpetual licences for all the IPR. This means the
Post Office could find that, when the system is installed and operating,
the IPR is owned by a third party. Such a third party would be ina
strong, position to drive a costly settlement with the Post Office.
Second, we are far apart on the price. We believe that the best test of whether
any price is reasonable is to compare it with the cost of terminating the existing
contract and purchasing comparable hardware and associated services from an
alternative supplier.
Even afier a late movement by ICL last night, ICL’s offer still represents
considerably worse (the gap is around £100 million) value for money compared
s based on the
with the option of going to an alternative supplier. This.
assumption that we would need to pay £150 million to ICL to settle the
termination (Treasury Solicitor agree with this assumption) - if the number
were larger, so the gap between the ICL offer and the alternative would reduce.
But even if there was further movement from ICL on the price (and the signs
are that significant movement is unlikely), the contractual issues - in particular
that of conditionality - are showstoppers in their own rights.
What are the alternative options?
At the moment, there seems no alternative to termination:
- ICL have withdrawn their December 1998 offer to proceed with the
original Benefit Payment Card (Option A). This Option is therefore
effectively dead;
- The B1 option (in which the Post Office would create benefit accounts
accessed by a smartcard) has an even worse value for money gap (£300
million) compared with termination. And the same problems on
conditionality would also apply.
HMT00000030
HMT00000030
}
Way forward
If termination is the only realistic option, the key must be to ensure that we
move as swiltly as possible to negotiations on a termination settlement, while
protecting the public sector’s legal position. Ideally, we would have a public
line, agreed with ICL, for use during this time, but we have prepared a media
handling strategy for whichever way these termination discussions go.
But at the moment, discussions with ICL have not broken down, and we must
avoid saying anything now that precipitates such a breakdown. We therefore
advise no change in the lines to take (attached). However, Keith Todd (ICL) is
meeting Alan Milburn and Stephen Byers at 10am today, and we will advise
further in the light of that meeting.