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John Roberts
Chief Executive
The Post Office
148 Old Street
LONDON
ECIV 9HQ
28 September 1998
++ ++ "REI" BAOCL PROGRAMME *
RT eee
The appointment of Graham Corbett as Independent Advisor to the HM
‘Treasury has initiated commercial discussions between the parties on the way
forward for the BA/POCL Programme.
There is no doubt that a high degree of creativity will be needed to construct ap
acceptable and workable way forward.
As apart of this ICL would like to engage with the Post Office to explore the
opportunity for the Post Office to acquire a stake in ICL Pathway. This we
believe offers anumber of benefits. :
We discussed the broad ideas with Paul Rich on Friday 25 September and
agreed to produce an outline paper which is attached. ;
Lhope that this can be discussed further this week, prior to the meeting between
yourself and Keith Todd scheduled for Monday 5 October. I shall therefore be
> discussing with Paul Rich whether an carly meeting, possibly with Gerry Cope,
can be arranged. so
Yours oa a
J. H. Bonnott
JOHN BENNETT seater -
ICL Pathway Ltd
. Forest Road
cc: Paul Rich : ’ Felthant I
Stewart Sweetman - . . Middx '1'W13 7EJ
af Tel
Jerry Cope . Fax
- "eer crosses
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BA/ POCL PROGRAMME
EQUITY STAKE BY THE POST OFFICE IN ICL PATHWAY
1 INTRODUCTION
The Horizon Programme is vital for the long term business interests of POCL and the
Post Office.
The Programme is at a critica! stage and must be restructured ifit is to go forward.
ICL financial investment including future commitments stands at some £250m with a
future funding requirement of a further £250m before the peak cash flows are passed.
An external cash injection of £250m is considered essential for any successful
Zestructuring. ‘The options to achieve this include an early direct payment. from-HMG,
a guaranteed payment profile over the contract life, and an equity share in ICL
Pathway by the Post Office, ICL considers that a major component (but not the only I
one) of a solution should be the equity approach.
ICL believes that a joint approach along these lines brings together the strategic
intent of both organisations and aligns the incentives to rapidly implement the
Programme and aggressively search out and win new business streams .
2 EQUITY PROPOSITION
It is recommended that POCL takes a 49% stake in ICL Pathway with the share price
to be based on the par value of the current assets of the company. On this basis the
equity stake would be £125m. ICL Pathway already has a set of arlicles of association
and trades as a separate entity.and these would be modified by agreement with the
Post Office to assign appropriate rights to the Post Office including Board
representation. The ICL cash requirement is such that this arrangement must bein
place by 31.12.98
3 OPTIONS AT 2005
Recognising the current contract term for the Programme, a number of. safeguards are
available for the Post Office at the end of the contract term. Firstly the Post Office
could, on conditions to be agreed, acquire the full equity ownership of the company
and ICL’s involvement would from that point in time cease. The Post Office would
under these arrangements be free to manage the Programme as they felt best including
bringing in a new set of IT companies if this was considered necessary.
Alternatively, the Post Office could extend the existing arrangements. A new service
maanagement contract with ICL Pathway could be put in place. The contract length
would depend on the investment decisions then to be made for the further
development of the services and any technology refresh needed for the basic
infrastructure. Depending on these factors the contract extensions could vary froma I
further long term arrangement to a rolling 1 year contract and the service pricing
adjusted accordingly.
Qoo2
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4 TRADING ARRANGEMENTS
It is envisaged that ICL Pathway would deal exclusively with POCL, and that DSS
‘would assign the PAS/CMS contracts to POCL . Service arrangements would need to
be put in place to provide the operating framework up to the end of the current
contract. No other changes to the service contracts would be required subject to any
changes agreed as part of a restructuring of the contracts to provide the complete
solution to the situation for the future. As an equity partner the Post Office would
share in the financial retus of the company and, through its Board representation,
the management decisions for the successful running of the enterprise, and the future
direction of the technologies to be applied. ,
. ____ _ Surthermore once JCL Pathway’s infrastructure is implemented across the Post-Office- - —
° network, it will be the only practical platform (duc to counterspace and timing
considerations) for all future services and their development. Because-ofthis-thePost
<Officeneeds-tochavesthe-ability tozinfluence'amd:direct-the-business-plans
® estrategyflCLPRathway.-Thus an equity stake in ICL Pathway is the best way
Post Office to achieve this.
5 PARTNERSEOP BENEFITS
The arrangements described above support a number of desirable outputs. It
establishes a real basis for partnership, with shared risks and rewards. It provides a
large proportion of the necessary funding framework for the Programme to proceed.
Any successful restructuring needs to position the Programme under one sponsor,
which can only be the Post Office. The DSS needs to be supported as a major and
highly valued client.
There are three unique benefits in the Post Office becoming the equity partner in ICL
Pathway:-
i) The successful implementation-of Horizon opens the;way for future new revenue
streams (eg Financial Services, Better Government) which should regenerate the
6 business prospects for POCL with additional income streams and contributions.
ii) The revenucs earned by ICL Pathway on these new revenue streams should be on a
better margin structure than the core business, due to the incremental nature of the
relevant infrastructure costs which will apply. These contributions will be shared
equally between the parties.
iii) The success of Horizon will maintain the Post Office as a major channel for DSS
business, with its positive effect on the additional new revenue streams.
It is ICL’s view that uo other.third party could benefit im this way, and for this reason
{CL considers the Post Office to be the natural, and sole, prospective equity partner.
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) - Termination of the contract would not only leave the Post Office with no prospect of
an alternative automated infrastructure for many years with the consequential loss of
revenues from the new business streams, It would release DSS from any obligation
to implement a card based payment service. Rapid progress to ACT would inevitably I
follow.
6 NEXT STEPS
It is essential that agreement to consider this equity proposition is placed before the
main Post Office Board urgently. Although there are many important details to
determine it will be necessary to reach an agrecment in principle within the timescales
of the HM Treasury review which has to report back to the Chief Seeretany by 16%
_October._
Richard Christon
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