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Mr McCartney
Minister of State
Department of Trade and Industry
1 Victoria Street
LONDON
SW1H OET 1 July 1999
Post Office Counters Led
Dear Mr McCartney
POCL/BA NEGOTIATIONS
At the last Committee meeting you asked us to write to you outlining the
position we have reached on the contract negotiations with the Benefits
Agency (BA) so that, through contact with Ministerial colleagues, you could
seek to resolve the impasse we appear to have reached with BA. A Paper on
the current position is attached.
As Mena Rego outlined to the Committee on 2274 June, the BA claim that they
have a remit from their Minister that sets a strict financial limit on what they
can agree with us,
The negotiating brief given to BA by their Minister appears to be based on
assumptions provided to KPMG for modelling purposes (independently and
in isolation from any discussions with either POCL or ICL). In effect it means
the BA team is unable to enter into sensible discussions around commercial
terms for:
* OBCS, as they wish to base the price on the old Related Agreements which
does not cover the additional costs involved in providing the service under
the new contract negotiated by HMT.
Providing benefit encashment services in post offices until 2005. The BA is
seeking to remove the contractual floor immediately, which even KPMG
assumed would remain until 2003.
Post Office Counters Led
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Clearly we would not expect you to enter into the detailed negotiations
around these issues, What we are hoping you would be able to raise with
your ministerial colleagues is the removal of these artificial constraints that
have apparently been placed on the BA negotiating team, so we are able to
enter into sensible and constructive discussions on appropriate commercial
terms both for OBCS and the retention of the contractual floor.
In doing this we would like to assure ministers we are not asking the
Department of Social Security to subsidise the Post Office or its network - we
are simply seeking a fair apportionment of the costs - as I think the figures in
the attached paper demonstrate.
Other issues that are highlighted in the attached paper, which we will clearly
be seeking to resolve through the negotiations with BA, include BA’s wish to
insert new rights of acceptance regarding OBCS from The Post Office. This
would mean The Post Office risking having to accept the system from ICL
with no assurance of acceptance by BA, or alternatively potentially delaying
the Horizon Programme during a separate BA assurance process.
We would be happy to provide further briefing if you require it.
Yours sincerely,
GRO >
DAVE MILLER
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Benefits Agency Negotiations
Background Briefing
1. The Benefits Agency Negotiating Brief
It would appear that during the course of Government discussions on how
the continuation of the Programme should be funded, Treasury sought input
from DSS Secretary of State on how much DSS would be prepared to pay.
Briefed by his team, on the basis of assumptions it had provided for KPMG
modelling purposes (in isolation from any discussions with either Post Office
Counters Ltd or ICL) he appears to have proposed the following payments to
Post Office Counters Ltd:
99/00 00/01 01/02 02/03 03/04 04/05
fm 371 395 401 399 333 220
This now has apparently become the BA position in the negotiations, and the
BA negotiation team is positioning this as its limit of empowerment.
2. The Post Office’s position
The Post Office has a number of issues with the stance BA - and apparently
the DSS - are taking.
(i) KPMG made it clear to all parties - including Treasury and DSS - that the
outputs of their modelling were only intended to form the basis of a value
for money comparison of the various options put to Ministers. The
information used was not based on direct input from all the parties
concerned. This means the model does not accurately represent actual I
cash flows (for example POCL VAT and pre-funding costs are not
included in the KPMG assessment).
Indeed, KPMG have noted in the qualifications section of the report that
“their work was carried out in isolation from POCL and ICL” and that
“POCL’s income from BA has been amended to reflect BA’s assumptions
for payments to POCL” (ie BA determined the figures that they now
claim to be the Ministerial remit).
Clearly there was no commercial negotiation around what should be paid
for OBCS under the new arrangements. What BA have therefore
assumed for OBCS is a price based on the previous contractual
arrangements which incorporated the continuation of the payment card.
The pricing proposal we have put to BA now reflects the revised
commercial arrangements with ICL.
ii) BA’s position is to remove the floor immediately even though the KPMG
assumption was that it would go when ACT became compulsory, which
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KPMG assumed would happen between 2003/4 and 2004/5. Not only is
this inconsistent with what BA claim to be is their Ministerial remit (ie
KPMG assumptions), but also it would mean BA effectively asking The
Post Office to maintain the costs of full provision of Benefit payment
services until 2005 without the income to sustain it.
The Post Office is also concerned that the immediate removal of the floor
will enable BA to seek product changes that will result in further volume
reductions before 2003. This is despite Mr Byers assurances to us that
Ministers had agreed there would be no changes to current payment
arrangements without our agreement.
We would require a much clearer understanding of BA’s plans for ACT
and therefore the level of service we would be expected to provide in the
two years in question. Without the ability to plan and manage changes to
our infrastructure in advance of very significant volume changes,
retention of the floor becomes even more critical.
The floor itself was part of a package deal in the last round of contract
negotiations and was agreed in exchange for concessions in other areas by
The Post Office. It appears BA want to remove floor now because the
circumstances it was designed for are now likely to occur as a result of i
their wish to move to ACT earlier than expected. If the floor is to be
removed then this would need to be done in the context of the whole bd
package.
3. Summary of the financial position
In very broad terms the gap between us stands at c £400m. About half of that
gap is down to BA seeking to pay an unrealistic price for OBCS. The
remaining £200m is down to BA seeking to reduce payments to POCL over
the life of the contract by removing the floor in the current contract.
Using KPMG numbers (with all the reservations attached) under Option B3
DSS have incremental savings of c £300m in NPV terms. The Post Office,
which has incremental losses of c £600m in NPV terms over the same period,
is only seeking c£130 m of those savings, which represents a fair and
reasonable price for its services.
BA’s position would mean that The Post Office would need to ask its other
clients to effectively subsidise DSS as a result of its refusal to pay a fair
proportion of Post Office Counters Ltd costs - something which we are not
able to do.
4. Further issues
There are a couple of further areas I wish to highlight where I believe it may
be helpful to have a wider Ministerial view. We reported on 22nd June 1999,
that we were reassured by the agreement between our lead negotiators that;
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(i) we should work together on acceptance of OBCS in the context of the
acceptance regime and time-scales of the current programme. Recent
developments with BA on the production of the contract indicate that
they are not operating to this principle ie BA have sought to introduce a
new schedule into the contract that seeks to impose onerous acceptance
conditions on Post Office Counters Ltd. This could in the worst case
cause delay to currently tight programme timescales. In addition, the
current pricing proposal is based on a service that BA specified and were
heavily involved in developing and defining, until they decided to
withdraw from the programme. (A copy of our response on acceptance to
BA is attached at Annex A.)
(ii) we should only seek to re-open areas of the existing contract directly
impacted by the Ministerial decision on the future of the programme,
What is clear to us now is that having decided to dispense with the
Benefit Payment card, BA is secking to obtain from OBCS similar levels of
product security and risk transfer as they would have enjoyed with the
Payment Card. We have pointed out that we can only provide what ICL
have been contracted to and have already built. Any changes BA require
would have to be introduced within a proper change control environment
with costs and service implications fully understood and agreed.
Furthermore, BA are seeking to transfer major risks to Post Office
Counters Ltd - who cannot lay off the risk to ICL under the agreement
brokered by Treasury. These simply place greater obligations on Post
Office Counters Ltd and would therefore need to be reflected in an even I
higher price for OBCS. {
5. Conclusion
BA has a very ambitious programme of change to deliver if it is to achieve its
ACT ambitions. Getting into entrenched positions on the terms of a contract
that is already in place and should have been budgeted for will not be helpful
in developing the kind of joint working arrangements that need to be in place
to support the delivery of Horizon into the network, prepare the Post Office
network to be in the strongest position to face up to the loss of BA business
and provide the level and standard of service that BA needs to be in place for
payment of benefits in the lead up to ACT.
During discussions BA have continually stated that their Minister is not
prepared to fund the Post Office. We in return have made it clear that we are
not asking to be funded by DSS but we are seeking a robust commercial
arrangement whereby BA pay a fair price for the service we are providing.
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Aniwex A.
Post Office Counters Ltd
Vince Gaskell
Programme Director
Rm B2506D
DSS
Long Benton
Benton Park Road
Newcastle Upon Tyne
NE98 1YX 25% June 1999
Dear Vince,
Acceptance
Following our discussions on Acceptance on Wednesday 23 June - when I
believed we were on the same wavelength - I was not a little surprised to hear
from my contract team that we had now received a draft Schedule 16b.
This seeks (amongst other things) to impose a full blown Acceptance process
on POCL for the OBCS service which effectively replicates and enhances the
previous arrangements between POCL and ICL.
Given the stage we are at on Acceptance with ICL, and bearing in mind your
own Team’s heavy involvement (and Leadership) on the definition and
development of the solution as well as the early stages of the Acceptance
process, I believed we had agreed that the way forward was to carry on
informing and consulting you regarding the OBCS service wherever
appropriate.
This was the basis on which our teams met last week and started to develop
working arrangements between us that would take us through the very tight
time-scales for Acceptance.
In this context the proposed schedule 16b is wholly inappropriate. It would
place a heavy resource demand on key staff in POCL to support its
requirement at a time when that resource is already fully engaged on the
Acceptance of the ICL service and there is absolutely no way that POCL could
agree to actions that could result in delaying overall acceptance - as you may
realise there is a heavy price tag attached to sucha delay under the terms of
the new agreement brokered by the Treasury. King Edvard outing
King Edward Street
London
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Tam happy for my team to continue to work with your people on the basis
that we have previously been discussing and would suggest that this is the
most sensible way to go forward. If we attempt to discuss schedule 16b, 1 am
certain we will disagree on many fronts, and this will preclude you from
gaining the reassurance you would like on OBCS.
I will be writing further on the other elements of our discussion on the
contracts between POCL and BA but I was keen to ensure that there was
clarity between us on this particular critical area of activity on the
Programme.
cc Sarah Graham - DSS
Ken Davenport - BA I
Paul Hanson i
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