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Post Office Counters Ltd
Stuart J. Sweetman BS¢ FCA
Steve Robson Morte Seca
HM Treasury
Room 113/G
Parliament Street
LONDON
SSIP 3AG April 1999
Dear Slows.
Horizon
As we are entering the last couple of days of discussion with ICL on the
Government's ‘preferred’ alternative, I thought that, for avoidance of
any doubt, we should make our position clear about where we are, and
what we must assume.
Richard Christou and I have been ensuring progress is made on
developing Option B1 further. We have been working on your
“preferred” Option B1 variant as agreed at our meeting last week i.e. BA
to make benefit payments through BACS into restricted POCL “Bank” -
accounts accessed by PO smartcards - using ICL as our operator and
building on much of the existing BA/POCL infrastructure.
A lot of work has been done by our respective teams to establish a
common understanding of what is entailed in this solution. Where
information has been available to us we have shared this to derive
assumptions on which cost and risk estimates can be based. We have
also shared these with your advisors as we have gone along. Of
necessity many of these estimates are still very soft as you will
appreciate.
Post Office Counters Ltd
King Edward Building
King Edward Street
Continued........
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We have agreed that as neither ICL nor POCL have the relevant
banking experience ICL will need to involve a Bank such as Girobank to
help them operate these accounts. We have involved Girobank in
discussions but, given that clarity on requirements has only been
progressively emerging, whilst they are willing to enter into discussions
they are unlikely to provide committed costs to the solution within the
aggressive timescales. ICL will therefore have to make some very broad
brush assumptions on the cost of supplying account management as
part of their proposal to us and we have to agree amongst other things,
whether it is ICL or the public sector who should take the risk of any
underestimation of these. We have fed these assumptions into KPMG
to be taken into account in assessing the options on the way ahead.
We have agreed with ICL that in the interests of making as much
progress as we can in the limited time left we will work together on the
wide range of issues that need to be resolved if we are to try to produce
some draft Heads of Agreement around Option B1 by Monday.
These issues include the service specification and business rules; the
prices and costs; the appointment of roles and responsibilities (with
associated risks); the key dependencies and conditions (including for
example, system acceptance methodology; DSS plans; and regulator
issues around banking status); the principle and method of separating
the past from the future in changing from Option A to B1; future
contractual relationships; the broad programme timetable and length of
contract guarantees; and developing a new public/private sector
partnership. These are a formidable array of issues to settle even on an
‘in principle’ level, and we will do whatever is possible. Certainly we
are making strenuous efforts with ICL today and over the weekend.
However, our view of Option B1, despite further discussions with ICL
over the last few days is that, in terms of potential incremental value
creation in achieving our strategic ambitions over Option A it is at best
marginal and in our view we will not be able to justify the additional
Continued........
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costs and risk assessments as matters stand. Certainly in helping POCL
realise its network banking aspirations it provides no significant
advantage over Option A. Indeed it is outside our original strategy as
we would need to become a bank ourselves albeit with ‘limited’
accounts. In terms of our Government Gateway markets, without
further Government commitment to maximise Government use of the
smartcard, its introduction offers only a small advantage over the
Benefit payment card in Option A, given the migration route we had
already foreseen in that option.
I say this not to be pessimistic, but to be realistic. We have been
consistent in this view, ever since the idea of another approach emerged
following Post Office’s agreements with ICL on Option A before
Christmas. It took a great deal to persuade our Board that the deal we
struck then was acceptable, but once we did, we were prepared to
commit to it, Others were not.
You will know that Neville Bain and John Roberts have both in the last
week reinforced the point J have made to you before, that the Post
Office will not approve a business case that loses value from what it has
already agreed.
So, it is only right that I set out now what that implies given what is
emerging from our negotiations with ICL this week, and the associated
assumptions, Without your agreement ‘in principle’ to these, I will not
be able to sign any Heads of Agreement with ICL of any status that
commits the Post Office. Richard Christou is fully aware of this. It
would be irresponsible to mislead him. The scale of the NPV gap to be
bridged in the Post Office business case could be, from the figures I
have seen this week (both from ICL and taking into account DSS input
to KPMG and ourselves), up to £1bn from Option A. It is in this context
that we are continuing to face up to ICL to try to progress matters. But
we now must bring matters to a conclusion, or decide on another
option.
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I would need Government agreement to the following to enable me to
put a recommendation to John Roberts and the Post Office Board:
1 As a minimum first step, to reinstate the essential commercial
position that POCL reached during and after the Corbett
discussions, including:
(a) Acontract with DSS (or another Government department) for
providing services to enable benefits to be withdrawn in cash at
post offices until 2008
(b) Guaranteed level of payments during this period, per the floor
income, with its associated structure and terms, under our
Contract A with BA as agreed with them in principle before
Christmas (recorded in our draft Heads of Agreement with BA at
the time)
(c) Again as agreed at the time, back to back cover for associated ICL
system charges (per our contract B with BA for their services from
Government)
2. Government agree to settle finally, without any adverse impact
on the Post Office, any past aborted costs of Option A from ICL,
including that proportion of their proposed so called availability
fees under Option B1, which in fact relate to the change in
solution and not to future charges (ICL agree that this division is
correct). This is in line with the principle of separating the past
from the future that we have already agreed with you.
3. Even with these essential planks of a financial framework in place
this will still leave c£500m NPV (at 12%TDR) in extra running
costs that would fall to POCL plus an extra basket of risks
(including FSA compliance costs; costs of minimum capital and
liquidity requirements extra fraud risks of the new solution; extra
costs to us of managing these new risks; potential programme
and solution finalisation delays and costs of any EC procurement _
challenge). These are not possible to quantify fully at this stage,
but we are happy to work with your advisors to assess the cover
required.
Continued.......
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I would stress that these extra costs must include the costs of the
smart card, which, as we have said, we view as essential to this
new solution (without it, we see no real furthering of wider
government services compared with Option A).
HMT commits to pay the Post Office for these extra costs and
risks related to the new service. The mechanism for so doing will
need to be agreed. However we would point out that this could
build out from existing provisions in our contracts with BA which
cover their obligations should they wish to withdraw from
services under Option A. Smartcard services and provision may
however need mechanisms other than contracts with sponsors.
Weare prepared to discuss other mechanisms (but would stress
that any concept of subsidising is unlikely to satisfy the Board
that this is a commercially acceptable deal), including incremental
ideas around our new financial regime which we understand is
likely to emerge as part of the White Paper on the Post Office.
DSS and BA confirm that they will co-operate fully in the
necessary plans, protect against any changes in periodicity, the
appropriate usage and transfer of customer data, andagreeto
fund their own internal costs, associated with this change. We do
not believe DSS will have a role in future contractual relationships
or direct programme management with ICL. However, there is
likely to be a need for ongoing contractual relationships between
BA and POCL to deal with migration as well as the service
provision for the most difficult or disadvantaged customers in
society through, eg emergency or alternative payment
arrangements. The business rules of the services will be set by the
Post Office as part of the specification to ICL.
DSS confirms that provided the system has been fully accepted by
POCL and meets the essential requirements of the FSA and the
BACS interface BA will commence using the system without
imposing further acceptance requirements of its own.
Continued......
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HMT arranges (with a suitable sponsoring Government
Department) for ICL and POCL to work together on a few
identified new wider government services (building out from the
recent OFT and Electronic Government Reports) to put onto the
smartcard following roll out as part of the new partnership. ICL
and ourselves have some ideas about which these could be, which
we would be happy to share next week. This work, albeit
secondary to the core of the programme's delivery will enable
early use of the smartcard for Government, and also give ICL
some firmer commitments to Fujitsu about their wider business
case under ‘Golden Cloud’.
HMT help support and accelerate the necessary FSA or other
banking processes as far as they are able.
In addition to the above agreement from yourselves, we are also seeking
from ICL as pre -conditions to any agreement both:
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Confirmation that their commitment to and timetable for other
contracted POCL services on the system remains (this looks likely
to be the case from what they have said to date);
Confirmation that Fujitsu will continue to guarantee the future
programme, ina legally enforceable way, under the new
proposals.
Continued.
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I trust that these proposals help to focus decisions now within *
Government as we have to commit to ICL soon. I will be happy to
discuss these issues with you. Alternatively John Roberts has already
offered a meeting with you, him, and the DSS Permanent Secretary very
early next week, upon your return, which would be another way
forward.
Yours sincerely
STUART SWEETMAN
cc John Roberts
David Sibbick
Paul Rich
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