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. Loot ee ce SS.
PRIVATE & CONFIDENTIAL ATRE
THE POST OFFICE
OR NEVILLE SAIN
Chairman
“148 old Streat
*, . taypos*
-BY REIN Hy”
18 May 1988
The Rt Hon stepen ea MP
Horizon
Since we last met, discussions have coritinued on Option B3 with I your officials and
the Treasury as aa 1 requested.
We flap now hed a point where I think j it is important that I restate The Post
Office position on the various options available.: First of all, we continue to bélieve:
that Option Ais the ight way forward, are still, prepared to honour all current
" contracts, and believe that it is the oly option that meets the Prime Minister’s
requirements as set out by Jeremy Hoymnatt on 11 May 1999, 4, ys -
Itisa inatter of Siustanestile regret to us that this option, we are told, is now 1 Off the
table, as is Option B1,; which is not seen by Ministers‘as valuefor- money.
Our team has, cniute thetefore to work on B3 against the baekgroind of het tests -
required by the Post Office Board and which I set out to you in my letter of 27 April
1999. For ease of reference they are appended at Annex A,
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We still have not had-from Government a precise definition of B3 as it affects The
Post Office.-- However, our understanding is that under this option we would
effectively-be-buying.assets-and-an-operating-service:from:IGI--under:a‘schedule:of
fixed-payments:but:without-either.the-vital-underpinning:commitments:associated-with
<continued:and:automated:benefit payments-at post offices (at least, to anything like
the levels of business and timescale under our existing-agreements, or even Option A).
Nor would the fundamental components for developing our new markets, for example,
a card issued widely to many millions of our customers, be available.
We have now been asked to set out the terms under which B3 might become
acceptable to us and in order to consider this, we have attempted to estimate the
minimum income and cash funding profiles the Post Office would need from
Government. These are shown at Annex B. In the light of them, we would therefore
require the following: : :
™ A guarantee that Gavernment would provide this minimum income and cash
funding additional ta that envisaged under the proposed White Paper (without such
a guarantee we would face serious balance sheet issues, including immediate
liabilities to ICL that could exceed POCL’s assets).
_™ An ACT timetable which would start in 2005. .
™ A firm commitment by Government to use the new B3 infrastructure extensively
for existing and new services, including the possible use of a new smartcard for
such services. . .
™ Evenif the 3 points above are met, there are a number of other significant issues
outstanding which would require around 3 months work before any unconditional
agreement could be signed with ICL.
Without these commitments, a large part of our core business, e.g. benefit payments,
would be removed without the certainty of means to replace it with significant new
business. In such circumstances it would be impossible for us to sustain the current
nationwide network. :
As a result, B3 does not appear to The Post Office to meet the tests I set out and thus
provide an acceptable commercial case to which the Post Office Board could agree.
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Termination of the contracts and an honouring of commitments to automate post
offices produce a similar set of direct and indirect consequences for The Post Office.
Again we would need very significant funding similar to that described for B3, and the
other financial and customer issues would also apply, together with payment for
alternative automation of post offices. ‘Compared to Option A, as matters stand,
termination does not meet my commercial tests.
In addition as I said to you at our meeting on 6 May, we must also consider in the
event of termination:
™ impact of litigation including who holds the ring;
™ communication; ra ' :
™ honouring both Government’s and our commitment to automating the Counters
network; :
™@ the approach to be taken to sub-postmasters.
Thope this letter gives you a very clear statement of where The Post Office stands.
DR NEVILLE BAIN.
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Annex A.
* COMMERCIAL TESTS
Is the case a commercial one with fairly balanced risks? In other
words one that gives a positive NPV at an appropriate discount rate
Can the funds be generated in such a way that they do not
prejudice other planned Post Office activities (which may have
a much better return)?
What is the impact and timing of the costs on The Post Office
and POCL Profit & Loss accounts? In particular the Board will
need to consider if the proposal:can be accommodated by Post
Office Counters Ltd without nt technically bankrupting this
business.
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P&L AND FUNDING REQUIREMENTS
POCL require the following additional income stream:
Annex B
Year I 99/0 00/0 I 01/0 I 02/0 I 03/0 I 04/0 I 05/0 [06/0 [07/0 I 08/0
0. 1 2 3 4 1I°5 6 7 8 9
£m 66 21} 131 96I 128] 382] 530]. 412] 241I 159
Cashflow:
Additional to the above (and excluding a POCL require the following funding
from Government:
, Year I 99/0 [00/0 I 01/0 0270 03/0 I 04/0 I 05/0 I 06/0 [07/0 I 08/0
0 1 2 3 4 5 6 7 8 9
£m 101] 244.
The repayment profile of such funding (net of interest) will be as follows:
Year I 99/0 I 00/0 I 01/0 [02/0 [03/0 [04/0 [05/0 [06/0 [07/0 I 08/0
0 1 2 3 4 5 6 7 8 9
‘I £m 61] 62] -65] 66] 56] °20
These numbers are at outtum prices and are indicative only, and will need to be
revised in the light of final agreements. They reflect the terms of the “counter offer” .
being put by HMT to ICL on the evening of 17 May 1999.