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Horizon Working Group Members
IDES FED SPECIAL PSGJECT NO41E2 OF
uti
TO: Sarah Multen TIMT FAX:
t
Adam Sharples IMT
Addan Montague = HMT
Ross Newby} HMT
Joseph Hallion HMT
David sid DIT
Jeremy C runip cITU
Geoff Mulgdh No. 10
Jonathan Evans Post Office
Paul Rich ; Post Office
George MeCorkell BA
it
Hamish Sandison Bird & Bird
FROM: Sarak Griham DSS
PED Special Project
Room 535 North West
The Adelphi
1-11 John Adana Sireet
LONDON, WC2N6HT
MESSAGE: i
If you have recelved this fax in error, please call back on the telephone number given
above, and then destroy the material. Please treat our information with the same
confidentiality that you would expect us to do with yours.
i
:
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oe hemaneger +
Ho. Lo)” Brom: Sarah Graham PED Sp Proj
Date: 13 November 1998"
Copies: HMT: Adam Sharples
ids ’ Adrian Montague
Joseph Halligan
Ross Newby
David Sibhick DTI
Jonathon Evans POCL
Gcoff Mulgan Noa. 10
Jeremy Crump CITU
George McCorkell BA Proj Dir
Paul Rich POCL
+ Wamish Sandison Bird & Bird
BA/POCL AUTORIATION PROJECT: TOWARDS AN INTER-MINISTERIAL
DECISION i
1.
2.
An preparation for the Inter-Ministerial mecting on Tuesday, and as agreed at the Jast
Working Grdip meeting, it is important that we do not concenteate on att analysis of
the ICL proffosals at the expense of giving Ministers the Opportunity to consider
whether “ley: still wish to continue with an option around the project “as is", or
whether now:is the time to pull the plug and open discussions with ICL either around
an alternative option or a negotiated termination.
Tattach a note Of some of the main issues that I belicve the Working Group should
put to Minisiers, which do not naturally fall out of the evaluation process we have
been following.
. 3. _ Tuming yo the ICL.proposals themselves, having had the benefit of attending. the
presentation they gave yesterday, I am quite clear that the proposals taken together
do not present a sufficicntly significant move on ICL’s point to meet Ministers’
original criterion for the discussions - to find a commercial "deal" acceptable to
Government, The analysis that DTI/POCL has put to you completely ignores the
transfer of risk that underlies the ICL proposals - Government/public sector parties
being asked fo underwrite not only the new loans but the ones that already exist;
guaranteed payment to ICL, with scant regard to the level of performance; significant
price increast; payment in advance; acceptance of the project before it is fully trialed
_ in any systeinatic form: by any token this is a complete re-write of the contract
AN,
which was ofiginally let; certainly changes the original PFI concept of transferring
some risk to the private sector; re-draws the project in terms of the contractual basis,
the specitication, the funding - now put at £600 million over the life of the project for
ICL of which £480 million is to be underwritten by the public sector sponsors. In
practical “eriis, to close the deal as David Sibbick says, Government needs to commit
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a further £120 million and more - for the privilege of. allowing ICL to continue with
othe projo:t, and possibly glean somie future benefit from "the golden cloud” which
hovers over fhe partnership agrecments with POCL.
4. Against this backdrop, you should be aware.that DSS/BA cannot see the case for
' > Government continuing negotiations on Option 1. To do so, in effect, will tie us in
until 11 Decimber (see Jonathon Evans’ paper - and f agree, if we are to embark on
. a fusther round, we will need something like his suggested timetable even to get so
far as Heads,of Agreement); we will, in effect, have authorised Government to spend
another £40 million on the project since Ministers first aimed to make a decision on
this in July; the further we go down this route, obviausly the more difficult it is to
pull out - we are committing more and more to the project - for example, in
preparatinu fcr the introduction of the Card, DSS is now having to embark on a huge
Amount of preparatory work to organise the implementation (preparation of forms,
operational arrangements etc) which may or may not be needed:
5. J think it is iso worth poivting out that against this background, it is increasingly
likely that we will, after all, need a substantive Accounting Officer Direction, should
Ministers decide that the project should continuc on anything resembling the terms
proposed: by ‘ICL.
6. It may also be: worth making clear to Ministers that a decision to proceed will depend
on how mucly further funding POCL/DTUHMT are willing to commit: as you know,
DSS/BA have: nothing further to throw into the pot, beyond what they bave already
offered under the Corbett proposals.
Vs Finally, 1 am sending through to you some manuscript amendments to the draft you
haye just sent me: paras 1-12 so far; the rest to follow.
MRS SARAB GRAHAM
PFD Special Projects
Room 535
Adelphi
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BA/POCI. AUTOMATION PROJECT: © TOWARDS AN INTER-MINISTERIAL
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4 :
“Alde-memoire" olbsues that may have escaped the formal evaluation procéss
1 riskiz off continuing with the project:
i
why should ICL performance improve dramatically in the future over the
Dust?; Apart from the well documented and continuing delays, ICL have
dragged their feet every step of the way, always looking to do less rather than
more gg. constant arguments about the security requirements for tue BPC have
ory recently been resolved, although these were central to the DSS business
ard policy objectives for undertaking the project at all.. There is no evidence
that ICL is making extra efforts to Keep to committed milestones since they
were !placed in breach of contract by both parties last November eg. the
Ostotier, 1998 milestone for the software required for delayed operational trial
(11 mionths late) was not met. The whole tenor of the discussions around the
negotiations with Graham Corbett was to make life much casier for ICL than
under the current contract: easing requirements, cutting comers etc: and this
is fucther reflected in spades in the Iatest (9 November) proposals from ICL.
This camnot bode well for the future. Hither the project is in the end going
to cost much more than is envisaged, to get the quality and timely product we
nced;,or, just as likely, it will not be delivered on time or in totality; or most
likely of all, a mixture of both.
incomplete "roll-out" to Post Offices: cven if ICL mects its commitment to
develop the system to an agreed timescale, it cannot - and bas no confirmed x
plans - ta mect certain isolated Post Offices whichare too difficult and”~
experisive to “wire-up" with existing solutions; it is arguable that these would
‘be: amongst those very offices that for "social" reasons the Government would
wish to keep open, certainly for benefit delivery;
ICL commitment to the project fs likely to be reduced for the following
main reasons:
- _ in'their Jatest proposals, ICL are claiming they will be accepting a Joss of
£100 million over the life of the project; certainly the project will not be
eataing much, if any, profit for the organisation over its remaining life,
and. is therefore unlikely realistically to command their best or possibly
adequate Tesources;
- itis now understaod by ICL that the BPC element of the project has no
life for Government after contract completion; neither does it have any life
for ICL in terms of a wider product marketability; it is unreasonable to
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expect a high level of commitment toa product with no future;
2 cdumftitment of the public sector partics: the Independent-Pancl (which
¥ reported in July) quite rightly recognised the difficulties inherent in a project
designed around different and often mutually conflicting objectives; continuing
with the project merely cements these, and does not give an opportunity for
the three partles to re-group- and re-commit in any Significant way; if
anything, the different objectives of the two partics are naw cven more firmly
cemented following this year long period of debate.
2.. What arp we buying for the £5 billion that DSS will_ be spending on the contracts
with POCL nnd Pathway until 20087
. the DSS retum on this investment will be up to £850 million in fraud savings,
provided the project ts fully operational by 2002;
1 . all options (with improvement in the security of paper-based methads in the
: interim) can provide this same Jevel of fraud savings;
. 4 att earlier move to a fully operational ACT system would see additional
‘ aciministration savings of the order of £400 million a year being achieved;
. in effect, this could release around £2-3 billion over the next decade
(assuming DSS plans to move to full ACT over 3 years from 2000) which
Government could make available to spend on funding the Post Office and
ICL developments;
. ont this basis, a large number of Post Offices which mighe otherwise close -
over and above the 6000 we understand are planned to close anyway under the
Post Giffice Review assessment of the basis for a commercially viable nctwork
- sould be kept open; = .- (esd ws =e - -
e in additiou, a more transparent approach (eg. by giving social grants to certain -
. Post Offices that meet given criteria) could mean the Government has some
i infludice over which offices close, and which stay open.
3.' Will continuing with Option 1 really help the Post Office significantly more than
other options?
. the vem of the options carried out by KPMG showed that none could give
the Past Office a viable commercial, future, which sustains its current 19 000
network;
:
° a viuble Post Office network has to shrink, irrespective of whether Horizon
goes ubcad or not (as confirmed by the Post Office review); .
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. all duit option 1 docs is put off the agony for a further 2-3 years compared
with arrangements uncer the current DSS/BA contract with the Post Office;
1
° as shown above, there will, be plenty of money. from ACT administration
savings (once fully implemented) to cushion’any cliff-banger effect for the
Post Office, as it moves to a new commercial future;
bd the only viable way forward for the Post Office to emerge so far, is to:
i
~ © at as an agent of Government services, including but not dependent on
benefit delivery, and adding in information and other services that
Government may require;
aL
-t in financial and banking services; and
- oT ci ted, but probably marginal services, such as providing insurance etc:
« the Pist Office under any option has a further two years at least of guaranteed.
by
paper-based levels of payment from the Benefits Agency and accompanied
funding;
>
1
. it coud use that time to use and plan more swiftly for simple banking initially
followed by more sophisticated services in the longer term.
4 What will cuntinuing with the project really do for ICL?
e if a solution acceptable to the Government and the taxpayer is found it will not
give ICL what is normally understood to be a commercial rate of rerurn,
i certainly aver the'life of the project (under their proposals of 9 November,
I 3 they gre accepting a loss of £100 million);
qt -
_ ve provitied the project,is delivered (and that is questionable - see above) it could
help JCL market itself as a successful deliverer of lacge business systems;
BUT
i . there are better ways that ICL could do that eg. by delivering an adapted
t Horizon automation programme, with a banking facility instead of the
' — "Gespbke” BPC element: this should surely be attractive to ICL:
- thére must be significant savings to ICL in removing the BPC elements:
itlis relatively cheap to install (around £20 million) and there will be
savings in the service requirements for Card operation (eg. provision of
ul new Cards; Help Desk Services etc);
Ruvoun 7!
~ Wwsh vee 3
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- ist simpler and familiar to ICL -' they’ have delivered similar systems
; Stccessfully - eg. for First Direct; and
tog
- is{potentially, in itself, a marketable product globally - we understand that 1
Past Office systems worldwide are moving to banking-based IT/business
s@hntions;- . :
* ICL could work mich more overtly closely with Government in delivering its
futuré programme, rather than the past programme of a Previous “kal
admis t tration.
How will, {_ with Option 2 further the Government agenda?
i
In practice Fy may put off the Introduction of ACT for-longer than is theoretically
being plaaned: it may be difficult to change Payment arrangements for the 15 million
or so peopleveurrently paid by Order Books and Giros, and shortly after that expect
them to mové to an ACT-based/banked system; similarly we would be asking Post
Office and their staff to undertake 2 major changes in their business in a relatively
short per.od,
Will not rurther the Government’s agenda in terms of opening up “access to banking”
for all ~ currently under discussion within the Social Exclusion Unit, from which it
is evident that, without a major move ta ACT, other measures are marginal - or
Worte, cially divisive involving "poor people’s banking";
1
The B
beneficiavies}from the rest of the population;
Similarly it Will prolong the situation recognised by the Cluncellor and his plans for
WEIC, that ‘there is a distinct difference between the benefit economy - cash based -
and the world of work associated with payment ‘into bank account; with the access ~
this brings ta other financial services, payment by direct debit (and consequent
savings in bills for utilities); and arguably losing the opportunities offered by moving
to a banking-based system, to help support a sense of personal responsibility - a }
“band-up" rither than a “hand-ont" - that this Government is seeking to inculcate in \
its approach, fo Welfare provision. :
overnment he judged for its handling of this project?
In five veal time - or earlierl - Goverament could easily be judged to have e
rewarded a filled PFI project (and in the shorter term it may find itself under attack
from Anderskn Consulting who have been given, a very different package on NIRS
2; y
Es
In the short term the PAC have commissioned an NAO VEM study which will start
WY Wil
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ih itself is potentially socially divisive, marking ont often poorer on
cseo4
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immediately:Ministecs’ reach their decision on a route forward; this will certainly
Pore over all the detailed VEM. analysis. undertaken by the Working Group(s) and .
_ KPMG and however a decision to continue is justified in broader Government terms,
will raise: many difficult issues for Ministers about the BPC angle - which already
presents such difficulties in VFM terms, that the Chief Exccutive of the Benefits
Agency (CE/BA) has required a formal Direction from his Secretary of State to I
continue with the project while a decision is being taken:
. Ministers will need to give a very clear justification for continuing with dhe project,
in order to ayoid the need for a further substantive Direction to the CE/BA WSS are
drawing up ar Ne of the sort of statement that would be required, for Ministers
to consider af ace ROGUE OR TT Neston ne ae ea for} probing
ofthe issues Wil be even more difficult: they have a duty to explore all. the
background © the issue of a formal Ministerial Direction;
. There will of a complete lack of evidence of "joined-up" Government:-
7
Government?! uld be accused of a lack of clear of strategy around cither the famre
of the Post Office network, or of benefit delivery - Government could easily be seen
as the victimeof ICL, as it fumbles for a strategic way forward on either front... {
£
e What may sem, the “safe" way forward now to continue with the project at all costs
(quite lireralf¥, will not look such a comfortable decision in five years time.
Sarah Graham
DSS/PED Sp Proj
13/11/98.
eee:
fn emt eee enue,
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BA/POCL AUTOMATION: UPDATE REPORT}.
Background
The BA/POCL aulomation project {known as "Horizon") has been under
Ceulew since the cantractar, ICL Pathway, was placed farmally in Greach of contract
after a key contractual milestone was missed. The project is now aver two years
fate, An (nar-departmental report ta Ministars (uly 1988) and an MTINo. 10 Palicy
Unit report for the Chief Secretary (September 1998) considered ihe options for
aking the ablectives at the project faqvard. Fallawing a Ministerial-discussion, twas
a one greed that the parties to the contrac} would be given one month Io establish
ee ge. Cay hather a commercial far praceeding with the canwact could be:faund. At the
ge / same time fall-back options ‘were prepared to provide a basis for Ydging whether the
a outcome ot the negotiations offered tha best value far money tor the jublic sectar as
4 whole. A report was presented to Ministers on this work on 23 October.
2. Following receipt of this report the Chief Seoratary wrote toll. Stating that he
_ and ‘his Ministerial colleagues were prepared to agree ta thelr req. Mest for a period of
two weeks for them to make progress Jn thelr discussions with theiPost Office to
develop a public/private partnership (letter to Kelth Tadd of 30 “Th This was on
{
1 condition that:
&
. nan binding “Heads of Agreement" for ihe proposal, apreert wilh the Post
-Office, were.recelved.no later than Monday.9-Navember -. wees
FA
. the proposal was based on a reallstic business case invataa § A exalicl or
implicit guarantees or commitments on the part of the publi sector for future
additional business; a
. that (CL and the PO seriously considered the case far involving a third party
with wider retail experience In the partnership - or otherwisit demonstrated
how the necessary skills would be acquired.
“3. We have now i received ICL/PO's proposal for the partnership, ugreed with
Post Office Counters. ICL have also provided 3 additlo! opal papers addressing
commercial, contractual and financing issues. Minister's ‘Ss must _ decide:
. whether the partnership praposal meets the osha set Sutil in the cst's latter
of 30 October;
. whether ICL's proposal on this and the wider deal represents sufficient
movement to be a constructive basis for further (time-limited) discussions ‘with
the public sector;
- whether further discussions are likely to deliver a deal whiefs represents value
I
f
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” for manéy when compared te the fallback options, taking ino account the
tisks and rewards of oach option. \ :
4, However befare providing an assessment of [CL's praposais it is worth briefly
cavisiting the reasons why a decision an a way forward is urgently!required.
x K
Objectives of the Horizan project y we ad,
i pos er ©!
5. Harizan was initiated in 1993 with the alm of: ?
a eae
° providing a more secure and efficient way of paying benetis . wa ey aut
£ ; e
+ providing DSS/BA with the means to account fully for thelr ramme ACS UF
expenditure; H y we -t
. automating PO counters, to make currant business more efficient and help
them to win new business; . ot
Out op — Feed Be ie
4 eee
be helping, 40 maintain the natignide nelworl foviding afecure revenue /- — —
Pw sheém from POCL's biggeSt customer until x S ®
Gee Seyi betes Bowl ©
6.°°* against the background of severe delays to the project {arfyoutes to (CL
. Pathway) Ministers became very concerned that there was a serique risk that the
a Gs Horizon project would fall to deliver its objectives - of would not da so in-atimescale. - =
that wauld make it warthwhile to groceed, i
Ve These concerns have prompted a number of Inter-departrtentat reviews of
the project and possible alternative options. These reviews fave jovided an
opportunity for Ministers to revisit and update the government's ralic\’ abjectives tar
the Horizon project. The hey goale@re:') Fonpur fr: funk Nur Shs ¢
REISE) ema pes eed
. to pay social security bonefits in a way thal is as cheap, efficiem, fraud free
and convenient as passible, consistent with plans tor welface reforen;
. 10 @ nationwide aetwark of past offices in order tajpratect the
accessibility ofGervices ovided actoss PO counters; t hee oust
7G mtn
~.
ts" of o,Improve delivery of existing and new government senvicds and information Ke
5 more generally taking full advantage of new technology; ‘
% Rertangr, atk. y
WWE
- to improve access to basic financial services, including baal ing services, for
poorer members of the community and the socially exclid sy
i
: to maintain a thriving IT sector in the UK, in which ICL is akey player; while
ensuring that risks transferred through PFI projects do not nd up wilh the
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taxpayer, Secs 1
2 oteor nt) gas Wese_Sdye let ¢ ts~ aeprcoe, Presper an
8. Decisions on whether to proceed with the contract or to mave into 4n wey .
endgame on the basis of ICL's fallure to deliver need to be set In the context of
these objectives.
mt OST
Assessment of the ICL proposal
9. Under cover of Keith Todd's letter to CST of 9 Nov, [CL suimitied four
papers. One meets the CST's request for non-binding heads of agreement ona
public/private pannership with POCL tor further joint exploitation of Horizon, and Is
also signed by POCL, subject to agreement with ICL on the widercoramercial issues
left outstanding. The other three are from [CL alone. 7
10. The partnership heads of agreement, while giving no quarante2s or
commitments about levels of future business, envisage:
. a joint masketing executive to seek out and develop hew business to
be transacted over Horizon; _—
: . @ single tender arrangement with ICL for certain spabitied areas of
. work, subject to value for money and procurement q siderations; and
. the possibility of involving a further partner with inate retail
experiance. byte frog joni Re ,
The heads of agreement are, in tha Post O view/a sensibidway forward on
which could be built a valuable partnership with ICLjWe have ndjestimates yet of
how much value might be added for POCL] [A prafieninary estimat Ie of the added
Value to POCL of the parinership is ...] Subject to HM Government teoheort and
satisfying various legal, regulatory and contractual constraints, P' CL. and (CL wauld
wish to work towards a binding agreement by the end of the yearif
11, Taking the Heads of Agreement together with the other thria papers, the
Proposal is an attemnt by ICL to reduce its risk, making the project more secure and
hence more altracilve to sources of Iimited recourse finance. ICL has-eeeepteda-
foss af £75-100m on reasonable central assumptions. lt hapes, tHaugh the further
exploitation of the system with POCL, to recover some or all of this loss (though we
have no figures). '
12. Key components of {CL's proposal are:
. increased prices, and inflation risk transferred back to sponsars
. greator guaranteed volumes across Ihe system , terion ftatoctacet
eee 7 @ contingency fund ferincentivise the delivery of thei project to timetable,
- payments in advance, rather than In arrears (but deri)
. a revised acceptance process {i Tinlive ult current peeetioe which
ee Oe Oe i
G ba Cninbultn, & clade Cay gap Akos.
A (Ee pric Sectar Pav hee anol HL Policy » 7
—_—_—"