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INTERNAL MEMO
TO: John Roberts
FROM: Stuart Sweetman
SUBJECT: HORIZON BOARD PAPER
par: ©) May 1999
For your car journey.
Here is the latest version of the Board paper without numbers and
annexes, Still too long, but it is work in Progress and will need more
polishing. Your thoughts would be welcome.
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POB(99)o/s
POST OFFICE BOARD
THE FUTURE FOR HORIZON
Purpose and Background
1. The purpose of this paper is to
* update the Board on the Progress of negotiations on the future of the
Horizon programme since the last Board meeting on 27 April 1999 t
* decide the Post Office's view of the way forward as Ministers are meeting
imminently. ; .
2. The timetable for the discussions has been driven by Fujitsu's written
insistence to the Prime Minister (7 April 1999) for new legally binding Heads
of Agreement (the “Agreement”), The Agreement would mean that Fujitsu
will provide financial support for a reshaped programme, and all historic
claims would be settled.
Progress of Negotiations
4, At the beginning of March 1999 Ministers agreed that, under the leadership of
Steve Robson, HMT, a solution (Option B) should be sought that would:
° enable electronic payments of benefits at Post Offices using a smartcard;
* involve mass conversion of order book holders, to this method;
* build a system capable of developing other new services and, in line with
HMT’s drivers, should be cost effective for the public sector as a whole;
* should not destabilise Option A (Horizon with the benefit card), or
prejudice termination rights against ICL,
5. From the outset, we made clear to alll parties that for POCL to sign the
Agreement we would need a strategically and commercially acceptable case
for approval by the Post Office Board, Following the last Board meeting the
Chairman wrote to the Secretary to State at DTI (27 April 1999) to make the
Board position clear, setting out the tests the Board would apply to a proposal
(see Annex 1 for letter). .
focus is on the cost and feasibility of the new service to the ‘public sector’
using KPMG and PA as advisors. DSS’ stance has been to focus on finding a
solution that transfers as much as risk and cost from them as possible,
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Automation Steering Group on 13 April 1999, These issues have been shared
with both Steve Robson (letter from Stuart Sweetman of 29 April 1999 refers)
and ICL’s Commercial Director. There are also difficult issues that need to be
settled between BA and ourselves if we are to be able to go ahead with B1.2
with proper cover and assurance as to DSS’ role in making the solution work.
These have been shared with HMT.
On 13 April 1999, the Prime Minister met Fujitsu's Vice Chairman,and,
apparently, expressed a desire to finda solution, and in particular, one that
enabled Modern Government.
The Agreement
9.
10.
The Agreement would be between POCL, ICL Pathway and ICL, and
* builds on the existing contracts signed of 15 May 1996 for services to
automate post offices (including the benefit payment card)
* settles all claims and counter claims arising from the original contracts (but
without financial payment by POCL towards that
* scopes the new services for smartcards and electronic benefit accounts
* describes the key commercial aspects, including pricing, timetable, system
acceptance, and funding
® requires the provision of a legally enforceable Fujitsu guarantee for ICL’s
obligations
* incorporates and updates the Public/Private Partnership agreement with
ICL, agreed in November 1998 .
During the course of the Negotiations, variations of the alternative options
have emerged. All of these would be more expensive and more risky to
POCL than the current Programme (Option A) unless we found further
offsetting Government backing. The focus of discussion has been around the
variant known as “Option B.1.2”, Other variants have been rejected, having
been proposed by either ICL or DSS, as either too costly or of having even
greater risk to us. The key features of the “B1.2” option are described at
Annex 2,
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Commercial and Financial Impact of Option B1.2
11. Annex 3 summarises our best estimates of the emerging impact of options in
both NPV terms and in profit and loss impact on POCL.
12. _ Itis very difficult to be firm about the impact, given the softness of the
costings, the absence of revenue streams, and the range of the new risks.
Nonetheless, it is clear that there are substantial extra costs to POCL with an
adverse impact on profit and loss, In NPV terms these could, be over £1bn
worse than Option A. This figure could be mitigated by returning to the
extended Contract ‘A’ revenue terms “agreed” provisionally with DSS during
the Corbett phase of negotiations (reducing our adverse figure by over £300m
NPV). The Temaining gap would need to fund ICL’s additional costs either
through lump sum development costs contracted by DTI/DSS/HMT, and/or
higher charges to HMT/DSS for the banking encashment transactions (over
and above ‘guaranteed ‘Contract A’ payments to us). The P&L impact of this
gap closure scenario from us is also shown at Annex 3,
13. This is before new risks. These are very difficult to quantify or put
probability factors to at this Stage, but are probably in excess of £300m in NPV
terms (including becoming a bank, unless exemption is funded, or the risk of
successful procurement uses challenge under EU).
14, Annex 4 describes the way in which the funding &ap could be met, applying
the tests set out in the Chairman's letter, Essentially it asks Government to
‘buy’ the new banking services in phase with our costs, including those that
banking service creates (with no obvious buyer of this service) has been
explored by POCL after taking views in the short time frame given from PO's
advisors (Schroders, Ernst & Young, Slaughters & May). The details still need
to be worked through given the potential complex EFL, taxation, balance
sheet, regulatory procurement and if P&L issues involved.
Key Issues and Options
15. We have been hard pressed by DTI to indicate the wider value to
Government of the new infrastructure and Smartcard capability building
upon the White Paper on Modernising Government, Our response has been
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16. There isno easily identifiable, or predictable, way forward. Option B1.2 is
turning out to be considerably more expensive than Option A, both for us,
and to the public sector as a whole. KPMG has advised HMT that it would be
up to £700m NPV (at 6% TDR) more expensive to the public sector, taking
into account extra running and set-up costs, increased fraud tisk, and settling
the past with ICL, However, it does enable a wider range of Modern _
Government services, would be technically acceptable to DSS, gives DSS ACT
savings, and avoids messy and costly termination with ICL (potential to cost
the public sector up to c£300m). The critical issue is affordability.
17. Option A (or a variant of A such as using smartcards earlier) remains the
most certain for us and would be our preferred way forward. Option A also
Temains, by far, the best VFM route for Government too, However, DSS
strongly oppose this route (hence the various alternatives that have been
developed) and seem to have persuaded other Ministers that it is not
workable,
Two things should not be forgotten about Option A as it now stands
following intensive discussions with DSS and ICL throughout 1998, First,
that, for the first time POCL accepted that BA could move to ACT without
hindrance and with our co-operation, provided that this was in reasonable
timescales - these were negotiated and agreed as starting from 2005 and
ending in 2008, without contract with BA extended to cover that period. This
is critical for our business case, and DSS (EMT) are continually trying to push
these timescales back. We need this period to develop the POCL strategy
without causing unmanageable network change. Secondly, Option A has a
migration route to social banking. It does not assume the benefit payment
card is the status quo forever, but is an important first step towards migration
to banking.
ICL now don’t believe that Option A could ever work as they believe DSS
would persistently act against its effective operation. Indeed they have
written this week to HMT withdrawing, on a without prejudice basis, from
the pre Christmas agreement reached with us on Option A. Option A
remains, by far, the best VFM route for Government.
18. Termination remains highly undesirable, messy and expensive. Our legal
stance would be that we are not liable for any termination costs and that DSS
should be responsible for any settlement as well as for finding alternative
" automation for POCL (they have a contractual obligation to do so). In
Practice, this will probably be politically unacceptable.
Our longer-term contingency work has indicated that starting again would
take two years longer to automate than Option A, damage our new vision,
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A variation on termination has been Proposed by DSS (”B3”) that allows DSS.
to withdraw, but would commit POCL to continue with ICL for its residual
I services whilst going ahead with an ACT timetable. We have rejected it.
I
19. If termination was pressed upon us then there would be a number of very
important conditions the Post Office should seek.
These are set out in Annex 5,
20. So, the proposed ranking of preferred options to us are:
1. Option A or a variant of it, such as introducing the smartcard earlier
* 2, Option B1.2 but only with the necessary funding and risk cover for POCL,
Termination can only be acceptable to us on the conditions at in Annex 5,
White Paper Implications
21, The proposed White Paper on the future of the Post Office needs to contain’
clear direction for the future role of POCL and its Network of post offices. The
White Paper publication, If the way forward on Horizon is based on Option B1
then the implications will need to be reflected in the White Paper, i.e,
descriptions of a
- the new benefit account service
- the role of POCL and the Post Office smartcard in Modernising Government
(and potential commitments by Government to use, and buy services, or the
new infrastructure)
- POCL’s banking status _
- the funding arrangements necessary to make Option B1.2 acceptable
Conclusion
22, The Board are invited to
() note the Progress made on discussions with ICL and others
(i) note the key issues that remain outstanding with ICL and DSS
(ii) note the current unclear state of the commercial assessment for Option B1.2
(iv) agree that given the levels of uncertainty involved with Option B1.2 POCL
should not yet agree to enter a legally binding agreement with ICL
(v) agree that only if guarantees are given by Government to fund us, thena
statement of intent for Option B1.2 with ICL could be entered into without
legally binding us .
(vi) agree that Option A remains our favoured way forward, but is unlikely to be
politically acceptable to DSS, and ICL has now withdrawn its commercial
Proposals around it,
(vii) agree that termination should only proceed if firm commitments are given by
Government as described at Annex 5,
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List of Annexes ,
1. Chairman's letter to Stephen Byers dated 27 April 1999
2 Key features of Option B1.2
~ schedule of new roles and responsibilities
3. Commercial Assessment of Option B1.2 v Option A
4, Paper to show how Government could pay for the new banking service to the
Post Office and close our gap *
5. Termination - Conditions for the Post Office
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