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Horizon Working Group Members .
TO: Sarah Mulleh IMT FAX: DATE: (3 Voyembo
H
Adam Sharples - © MT
Adrian. Montague HMT
Ross Ney by! HMT
Joseph Halligan HMT #
David sivvide DIT .
. ii : 1
Jeremy Crump crru i :
Geoff Mulgah No. 10
y :'GRO:
Jonathan Evans Post Office H H
Paul Rich : Post Office i H
iy : i
George McCorkell BA ; /
F ' '
Hamish Sundison Bird & Bird
FROM: Sarah Grisham DSS
PED Special Project
Room 535 North West
The Adelphi Es
1-11 John Adanz Street
LONDON, WC2N,6HT.
a
MESSAGE: ft
. F you have recelvied 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,
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Sarah Mullen une From: Sark Graham PFD Sp Proj
i Date: 13 November. 1998
Copies: HMT: Adam Sharples
Adrian Montague
Joseph Halligan
Ross Newby
David Sibhick DTI
Jonathon Evans POCL
Gcoff Mulgan No.10
Jeremy Crump CITU
George McCorkell BA. Proj Dir
Paul Rich POCL
i Hamish Sandison Bird & Bird
BA/POCL avroil ATION PROJECT: TOWARDS AN INTER-MINISTERIAL
DECISION
1. In preparatioit for the Inter-Ministerial meeting on n Tuesday, and as agreed at the Iast
Working ae meeting, it is important that we do not concentrate on an analysis of
the ICL projjosals at the expense of giving Ministers the opportunity to consider
whether “hey; still wish to continue with an option around the project “as is", or
whether now! sis the time to pull the plug and open discussions with ICL either around
an alternative’ option or a negotiated termination. .
25 ‘Lattach a note of some of the main issues that I believe the Working Group should
put to Minisiers, which do not naturally fall out of the evaluation process we have ©
been following.
3. Tuming 10 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 sufficiently 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 cf risk that underlies the {CL proposals - Government/public sector patties
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 inereasi& payment in advance; acceptance of the project before itis fully trialed
in any systeinatic form: by any token this is a complete re-write of the contract
which was obiginally 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 specification, the funding - now put at £600 million over the lifeof the project for
ICL of which £480 million is to be underwritten by the public sector sponsors. In
practical :ernis, 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
the projet, and possibly glean some future henefit from “the golden cloud” which
hovers over the parmership agrecments with POCL.
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 Dectmber (see Jonathon Evans’ paper - and £ agree, if we are to embark on
a further sound, 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
preparation for the introduction of the Card, DSS is now having to embark ona huge
amount af preparatory work to organise the implementation (preparation of forms,
operational suranga etc) which may or may not be needed.
J think it is ‘ilso worth pojuting 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 continue on anything resembling. the terms
proposed: by ICL.
It may also bs: 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 hav«: nothing further 1o throw into the pot, beyond what they have already
offered under the Corbett Proposals.
Finally, 1 am sending through to ‘you some manuscript amendments to the draft you
have just sent me: paras 1-12 so far; the rest to follow.
MRS SARAH GRAHAM
PFD Special Projects
Room 535 ~
Adelphi
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“Aide-memoire" ct that may have escaped the formal evaluation process
1 ‘The riskn off continuing with the project: :
. under the current contract: easing requirements, cutting comers etc; and this
‘to Cost much more than is envisaged, to get the quality and timely product we
7 — - COMMERCIAL & POLICY
why should ICL performance improve dramatically in the future over the
past? 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 eg. constant arguments about the security requirements for the BPC have
orily 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
Ovxtoker, 1998 milestone for the software required for delayed operational trial
ai uid ths 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
is further reflected in spades in the latest (9 November) proposals from ICL.
This cannot bode well for the future. Either the project is iu the end going
nced;, or, just as likely, it will not be delivered on time or in totality; or most
uh ely of all, a mixture of both.
incomplete "rotout" to Post Offices: cven if ICL niccts its commitment to
develop the system to an agreed timescale, it cannot - and has no confirmed
plans'~ to meet certain isolated Post Offices which are too difficult and
expensive 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 fo keep open, certainly for benefit delivery;
ICL commitment to the project is likely to be reduced for the following
main reasons:
- _ inttheir latest 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
edfning much, if any, profit for the organisation over its remaining life,
add i is therefore unlikely renlistically to command their best or possibly
adequate resources;
- it is now understood 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 to a product with uo future;
° cémupiitment of the public sector parties: the Independent Panel (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 parti¢s are now cven more firmly
cemented following this ycar long pcriad of debate.
.2.. What are we buying for the £5 billion that DSS will be spending on the contracts
with POL and Pathway until 2008? ©
. tlie DSS return on this investment will be up to £850 million in fraud savings,
provided the project ts fully operational by 2002;
i . all options (with improvement im the security of paper-based methods in the
interim) can provide this same Jevel of fraud savings;
° an earlier move to a fully operational ACT system would see additional
b administration savings of the order of £400 million a year being achieved;
i * ~. 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
t Government could make available to spend on funding the Post Office and
t ICL developments; .
{
. on this basis, a large number of Post Offices which might otherwise close -
: over and above the 6000 we understand are planned to close anyway under the
Post Office Review assessment of the basis for a commercially viable network
- sould be kept open; t
. in addjtion, a more transparent approach (eg. by giving social grants to certain
. Dost Offices that meet given criteria) could mean the Government has some .
1 infludice over which offices close, and which stay open.
! .
ice Significantly more than
3.' Will continujng with Option J really help the Post ¢
other options?
r . dre vim of the options carried out by KPMG showed that none could give
H the Past Office a viable commercial future, which sustains its current 19 000
network; . .
'
. a viable Post Office network has to shrink, irrespective of whether Horizon
goes ahead or not (as confirmed by the Post Office review);
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. all tide option 1 docs is put off the agony for a further 2-3 years compared
with arrangements under the current DSS/BA contract with the Post Office;
. as stbwa 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 2 new commercial future;
° the only viable way forward for the Post Office to emerge so far, is to:
H
- act as an agent of Government services, including but not dependent on
bepefit delivery, and adding in information and other services that
Government may require;
{
i ted, but probably marginal services, such as providing insurance ete:
ql
oh ape financial and banking services; and
2 the Pist Office under any option has a further two years at least of guaranteed
paper’ “based Jevels of payment from the Benefits Agency and accompanied
funding;
“eo. it couifa 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 cyntinuing with the project xeally do for ICL?
e if a salution acceptable to the Government and the taxpayer is found it will not
give ICL what is normally understood to be a commercial rate of rerorn,
certainly aver the’ life of the project (under their proposals of 9 November,
they gre accepting a loss of £100 million);
° provilled the project is delivered (and that is questionable - see above) it could
help 1c market itself as a successful deliverer of large business systems
BUT :
. there re better ways. that ICL could do: that'eg. by delivering an adapted
Horizon automation programme, with a banking facility instead of the
"Bespbke” BPC element: this should surely be attractive to ICL;
- wire must be significant savings to ICL in removing the BPC elements:
it! ,is relatively cheap to install (around £20 million) and there will be
savings in the service requirements for Card operation (eg. provision of.
. new Cards; Help. Desk Services etc);
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a
simpler and fwmifiar to ICL - they have delivered similar systems
_ Successfully - eg. for First Direct; and .
tok
- is{potentially, w itself, a marketable product globally - we understand that
Post Office systems worldwide are moving to banking-based 1T/business
s@htions; A .
oad ICL could work much more overtly closely with Government in delivering its
foturé; Programme, rather than the past programme of a_ previous
adenigistration. : .
How will cop tinuing with Option 2 further the Government agenda?
iy
In practice it 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 people: turrently paid by Order Books and Giros, and shortly after that expect
them to inovg 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 ttirther 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 to ACT, other measures ace marginal - or
worse, scially divisive involving "poor people’s banking";
1
The: BPC if itself is potentially socially divisive, marking out often poorer
beneficiaviesIfrom the rest of the population;
Similarly it wall prolong the situation Tecognised by the Chancellor and his plans for
WEIC, that‘there is a distinct difference between the benefit economy - cash hased -
and the ‘world of work associated with payment into bank account, with the access
” this brinys to other financial services, payment by direct debit (and consequent
savings in bills for utilities); and arguably losing the opportunities offered by moving
to a banlingsbased_ system, to help support a sense of personal responsibility - a
~"hand-up" rather than a “hand-our" - that this, Government is seeking to inculcate in
its approach. ? welfate provision.
overnment be judged for its handling of this project?
In five veal” time - or earlier! - Government could easily be judged to have
rewarded a filled PFI project (and in the shorter term it may find itself under attack
from Antersén Consuiting who have been given, a very different package on NIRS
Ds: 1
4 . °
In the short term the PAC have commissioned an NAO VFM study which will start
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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 fowever 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
continue with the project while a decision is being taken;
. Ministers will need to give a very clear justification for continuing with the project,
in order to ayoid the need for a further substantive Direction to the CE/BA (DSS are
drawing up an example of the sort of statement that would be required, for Ministers
to consider at their meeting on 17 November); without such cover, the PAC probing
of the issues; will be even more difficult: they have a duty to oxplore all the
background (i the issue of a formal Ministerial Direction;
« There will of a complete lack of evidence of "Joined-up" Government:
q .
Government?! uld be accused of a lack of clear of strategy around cither the future
of the Post Office network, or of benefit delivery - Government could easily be seen
as-the victiméof ICL, as it fumbles for a strategic way forward on either front.
e What may sém the "safe" way forward now to continue with the project at all costs
(quite Ii M1), will not look such a comfortable decision in five years time.
7 :
Sarah Graham
DSS/PED Sp Proj
_ 13/11/98
I
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BA/POCL AUTOMATION: UPDATE REPORT;:
Background
The BA/POCL auiomation project {known as "Horizon") hag been under
review since the cantractar, ICL Pathway, was placed farmaily in fyeach of contract
after a key contractual milostone was missed. The project is now aver two years.
tate. An Inter-departmental report to Ministers (uly 1988) and an HMT/No. 10 Policy
Unit report for the Chief Secretary (September 1998) considered the options for
faking the. abjectives at the project faavard. Fallawing a. Ministerial-discussion, it was
greed that the parties to the contrac! would be given one month jo establish
heather a commarcial far praceeding with the cantract could be:faund. At the
‘same time tall-back options*were prepared to provide a basis for jidging whether the
outcome ot the negotiations offered tha best value far monay far the ublic sectar as
@ whole. A report was presented to Ministers on this work on 23 coche
»,
2 Following receipt of this report the Chief Secretary wrote toll. stating that he
and his Ministerial colleagues were arepared to agres to thelt request fora period af
two weeks for them to make progress Jn thelr discussions with thajPost Office to
develop a public/private purtncrship (etler to Kelth Todd. ot 30 01 ar}. This was on
condition that: { :
i
° nan binding “Heads of Agreement" for the proposal, agreact wilh the Post
Office, were received no later than Monday 9 November,
. the proposal was based on a reallstic business case tavalut es Ta axalielt or
implicit guarantees or commitments on the part of the ae sector for future
additional business;
. “ that ICL and the PO seriously considered the case for weabi athird party
with wider retail experience In the partnership - or otherwisi demonstrated
how the neceseary skills would be acquired. ' .
3. Wea have now received ICL/PO's proposal for the partnership, agreed with
Past Office Counters. ICL have also provided 3 additional papers addressing
commercial, contractual and financing issues. Ministers must nav decide:
. whether the Partnership proposal meets the italia set outi in the cst’s latter
of 30 October; i
* whether ICL's proposal on this and the wider deal represents sufficient
movement to be a constructive basis for further (ime-limited) discussions with
the public sector;
7. whether further discussions are likely to deliver a deal which represents value
k
niin
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for moriey when compared te the fallback options, taking into account the
sisks and rewards of cach option,
4. However befare praviding an assessment of {CL's proposais it is worth briefly
ravisiting the reasons why a decision an a way forward is urgentlyjrequired.
Objectives of the Horizan project y
objec ne Horizan proj 94 Ss A) ‘
5. Horizon was initiated in 1999 with the alm of: i wit ™ SOL
i w
2 + providing a more secure and efficient way of paying benetks; 6 ee ey er
Ra ees
. providing DSS/BA with the means to account fully tor thelriprdgramme ACS
expenditure; i } y “7
. automating PO counters, to make current business mors offickant and help
them to win new business; oy 2?
Grant” Fo
ve helply pli terd the natigniide nelworlcby providing a-kecure revenue PA
ure from POCL's biggeSt customer until x md)
wnt bebe 2ovg
“gt yeas
6.°°* pgainet the background of severe delays to the project (aiff buted to ICL
gr Pathway) Ministers became very concerned that there was a seriaus risk that tha
Horizon project would fall o deliver ts objectives - of would not 39 30 in a timescale
that wauld make It warthwhile to proceed, 5
7. These concerns have prompted a number of Inter-deparim tenitat reviews of -
the project and possible alternative options. These reviews have frovided an
opportunity for Ministers to revisit and update the government's policy’ abjectives far
the Horizon project. The key goate(are’y Fay bus fui Nuns egrend
° fo pay social security benefits in a way thal is as cheap, efficient, fraud sree
and convenient as passible, consistent with plans tor weltace reform;
- ,
Ceeke Sap poe @ nationwide network of post offices in order tojet the 7 tut
;
accessibility oi Services provided actoss PO COUNTS, TR dee Sed
as
ts* gh met inpprove delivery of existing and new government senicks and information LL
more taki ti A
6 generally taking full (full advantage of rew technology; i
“ to tein access to basic financial services, Including bai tf services, for
poorer members of the community and the socially BrCtU Se
. Yo maintain a thriving IT sector in the UK, in which {CL is okey player; while
ensuring that risks transferred through PFI projects do not pnd up wilh the
i
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8. Decisions on whether to proceed with the contract or to mate into an
endgame on the basis of ICL’s failure to deliver need to be setin the context of
these objectives.
{
/
Assessment of the IcL proposal
9. Under cover of Keith Todd's letter to CST of 9 Nov, ICL sukmitied 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 POGL, subject to agreement with ICL on the wider;cormmercial issues
left outstanding. The other three are from ICL alone. t
1 0. The partnership heads of agreement, while giving no quarantess or
commitments about levels of fulure business, envisage:
:
. a joint marketing executive to seek out and develop hew business to
be transacted over Horizon:
. a single tender arrangement with ICL for certain spas ied areas of
- work, subject to value for money.and erocurement qi nsiderations; and
. the possibility of involving a further partner with finapciaj retail
experience. © es betr fen Se toaai Ban,
Prats,
The heads of agreement are, in the Post Office's wea eri ay fo ard on
which could be built a valuable partnership with ICL, have ndjestimates yet of
how much value might be added for POCL (A oreliminary estimate of the added
value to POCL of the parinership is -..] Subject to HM Governme: il consent and
satisfying vatious legal; regulatory and contractual constraints, PG@CL and ICL would
wish to work towards a binding agreement by the end of the yearif
14, Taking the Heads of Agreement together with the other thrsa papers, the
proposal is an attempt by ICL to reduce its risk, making the project mare secure and
hence more attractive to sources of limited recourse finance. ICL, accepteda-
loss af £75-100m on reasonable central assumptions. lt hapes, tHaugh the further
exploitation of the system with POCL, to recover some or all of thi logs (though we
have no figures).
g
12. Key components of (CL's prapasal are:
: Wn * increased prices, and inflation risk transferred back ta sponsors
. SD . greator guaranteed volumes across the system ,
wat 7 A contingency tund ferincentivise the delivary of thel brojact to timetable,
- payments in advance, rather than In arrears y (diet
. arevised soceptance process ote which
fae pac acter prs and fe Bo may
we Gort