Blind Copies:
Ovin Corrigan
Keith Baines
Sandra Rees
Liz Blackburn
Linda Hanratty
with compliments
Development Director
Post Office Counters Ltd
King Edward Building
King Edward Street.
London ECIA IAA
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IN COMMERCIAL CONFIDENCE
Without Prejudice and Subject to Contract
George McCorkell
Project Director
‘Benefits Agency
Holborn House
Caxton Road, Eastway
Fulwood.
PRESTON
PR24ZB
Dear George
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Post Office Counters Ltd
Development Director
16 October 1998
10168
HORIZON DISCUSSIONS: ‘AGREEMENTS’ AND ‘OUTSTANDING
BA/POCL ISSUES’
1.° AsI promised, I have recorded: where we are now on agreements, and the
few issues that are ‘outstanding’ between us as at today. I am pleased that
the former far outweighs the latter!
2. Iwas pleased we reached agreement last Wednesday around the terms of
the extension to March 2008 as part of our latest package offer to ICL
Pathway under the Graham Corbett ‘Option 1’ discussions. The key
elements of these are (£m in constant prices):
2005/6 2006/7
a) ACT migration 40% volume 40% volume
assumptions
b) Contract’A’ pernow,exceptc) per now, except c)
structure
) Contract‘A’ £320m £310m
floors :
d) Fixedcharge seeb) see b)
e) Variable charges see b) see b)
TotalBAcharge -- £320m £310m
(estimated)
2007/8
20% volume
~ see below
Nil ~-
£100m
estimated at £15m
£115m
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IN COMMERCIAL CONFIDENCE o
Without Prejudice and Subject to Contract
-2-
16 October 1998
George McCorkell
For completeness, up to March 2005, current Contract A and B structures
will prevail.
3. Wealso agreed, in principle, that DSS/BA would not object to the BES
application being used on other multi-functional cards we might promote
(eg a ‘Post Office’ branded smartcard), or that other applications could be
used on the benefit payment card, which we might promote or develop, if
it were made multi-functional.
This would be on the conditions that this did not adversely affect your
security requirements, materially delay any programme arrangements,
that PO would take responsibility for assuring data protection aspects,
and that benefit customers could not be forced to accept other.
applications alongside BES.
4, Ofcourse, all the above ‘agreements’ are dependent on Option 1 being
progressed, and are, of course, subject to contract. .
5. You raised on Wednesday the issue of POCL demonstrating to BA that it
was properly incentivised to complete national roll out of post offices, and
’ so, enable BA to realise the full extent of its planned administration
savings. As I have said before, our view has always been that essentially
this is an ICL Pathway implementation service risk - and we have put in
considerable extra funding, outside what we are contractually obliged to
do, to support that. Indeed, I have made very clear that our own market
development and process engineering benefits will not accrue to us either
until roll out is complete. We have a vested interest in ensuring this
happens quickly too. You will also have seen Jonathan Evan’s note to
Sarah Graham which sets out, for example, how seriously we are taking
this in planning to deal with the very most difficult offices.
6. Nonetheless, in the spirit of moving forward and settling all issues that
are important to us, we have considered carefully how we can convince
BA just how serious we are. In coming to a view, I have consulted with
Dave Miller and also tried to balance the right levels of your net savings
foregone, our ability to pay given our level of annual operating profit, the
/Iatest
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IN COMMERCIAL CONFIDENCE
Without Prejudice and Subject to Contract
-3-
16 October 1998
George McCorkell
latest agreed programme timetable, and the relevant dependencies upon
the rate of post office roll out. I have also tried to set a fair balance of
incentives as well as penalties (as originally augured in Contract A), and
am mindful of ICL Pathway’s proposals to us too about the incentive
. “funds pot” they have put to us.
,
Our proposal is set out at Annex 1, and I trust you will agree that it is
both fair and demonstrates our real commitment to completing roll out as
fast as is sensible. If we fall into the ‘penalty zone’ we could be faced with
the loss of over half our operating profit until that is remedied, or until
ACT migration really “bites”.
7. Finally, there are a few other outstanding issues which we should aim to
settle as part of the overall deal in the spirit of what we said we would do
“at the outset of these discussions.. These are set out at Annex 2; I hope that
they will not be contentious; but they do require clarity. I trust we can
work together, bringing in ‘experts’ as necessary, to clear these soon too.
8. I would be pleased to discuss these over the next few days.
Yours sincerely
GRO
Copy: Sarah Graham
Ross Newby, for information
Stuart Sweetman
Roger Tabor
Mena Rego
Jeff Triggs
Jonathan Evans
Dave Miller
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IN COMMERCIAL CONFIDENCE Annex 1°
Without Prejudice and Subject to Contract :
POST OFFICE ROLL OUT RISK: POCL OFFER TO BA - INCENTIVES/PENALTIES
A) Offer
1. POCL will pay £1million penalty payment per month to BA for each month
beyond 36 months from the commencement of National roll out should 100% of
Post Offices trading throughout the previous 12 months (ie months 25-36 after
commencement of National roll out) not be card enabled, until such completion is
made. This compensation will be payable for a maximum of 30 months, and is
subject to the number of benefit payment transactions per month being greater
thari 45 million (which we have calculated at 80% of current forecasts for the end
of the compensation period).
2. BA will make an incentive payment of £1million for each month in advance of 20
months from the commencement of National roll out that POCL have achieved
full roll out (ie 100% of Post Offices trading throughout the previous 12 months
are card enabled). This incentive will be payable for up to a maximum of 10
months,
B) Definitions
1. “Card enabled offices” = POCL’s ability to make card benefits payments securely
and for at least the same price to BA.
2. The percentage definition of post offices is meant to cover instances of post offices,
where - at any one point in time - a post office may not be equipped or open
because of business-as-usual trading reasons - eg a new post office recently taken
over but waiting for equipment; or ‘seasonal post offices’ not open at that
particular point. An alternative definition might be “99% of post offices”.
C) Conditions
1. Benefit roll out completion: no compensation will be paid by POCL until 95% of
benefit transactions are capable of being made by Benefit Payment Card. Current
plans showing the last benefit rolling out 25 months after the commencement of
National roll out. There is a programme link to completion of this and pace of roll
out around change management issues.
2. POCL should not accept liability for force majeure, eg strikes/bankruptcy of ICL
Pathway or its subcontractors.
3. POCL should not be liable should BA contribute materially, for its own reasons, to
deceleration of roll out. (eg by delaying major software releases as this has
potential knock on effect to eg POCL training.)
IN COMMMERCIAL CONFIDENCE. : Annex 2
Without Prejudice and Subject to Contract
HORIZON - BA/POCL: OTHER OUTSTANDING ISSUES
. There are three other outstanding issues between BA and POCL in regard of the
BA/POCL project ~ :
1. VAT and Contract B
Both parties have worked hard together to persuade Customs and Excise that their -
view that VAT charged by ICL Pathway under Contract 3 is not chargeable as VAT
on Contract B means that either:
« the input VAT is treated as an unrecovered charge and passed straight to BA
who cannot reclaim it within their budget, or .
* the input VAT is absorbed by POCL and does form part of the charges under
Contract B.
Weare scheduled to go to tribunal next week to try and change the Customs and
Excise ruling. If the tribunal is successful then there is no issue. If, however, it is
unsuccessful there appears a number of options to us;
a) proceed as above with either BA or POCL shouldering the VAT burden in
solus (circa £7m pa in steady state) neither party would wish this;
b) split the difference between us;
c) change the way the charging schedule works to place service points from
BES into PAS. POCL would suffer higher less discounts on its residual
transactions but BA: would gain higher discounts in PAS. Guarantees would
need to be adjusted to ensure the same amounts were due by each party as
originally intended.
It would be useful to agree now what the position should be in the event of an
unsuccessful tribunal to avoid another ‘running sore’ appearing after these
negotiations. We need to bear in mind the different VAT-recovery positions of both
organisations in deciding.
POCL would like to propose that should the tribunal be unsuccessful the Authorities
will work together to achieve option c) above, Tim Brown (or Kevin Corrigan) have
been working with Ken Davenport on this issue to date, and Tim stands ready to
discuss.
2. The Common Basis of Settlement
An apparent difference of opinion has developed between the Authorities over the
interpretation of the Common Basis of Settlement between them. POCL takes the
view that it is what the system has told the clerk to pay out, BA take the view that it
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IN COMMMERCIAL CONFIDENCE , Annex 2
Without Prejudice and Subject to Contract
excludes payments made by BES in error. Settlement to date has reflected the POCL -
interpretation. : .
This has led to much debate (up to, and including, our respective Finance Directors)
over where the boundary lies between PAS and BES because many PAS
requirements are met within BES. POCL is willing to accept the BA interpretation of
the boundary if BA is willing to stand by the original interpretation of the CBOS.
This, of course, excludes where POCL staff have paid out something different to that
shown on the screen. Again, our relevant experts would need to take a view - but I
would hope that this could be put to bed now too.
3. OBCS
It also seems that, from discussions on the programme prior to the present
negotiations, BA have changed their requirement of OBCS from the original plan
now to be only at high fraud risk post offices. I think for completeness and to avoid
another post negotiation area, we need to nail this down across all three parties. The
assumption we have been working to assume OBCS at all BG post offices (ie
excluding Northern Ireland). Any difference in this will affect both ICL Pathway
and POCL's projections. It would be useful if you could clarify the position to all for
the sake of completeness. oa
SSA - for information
In addition to the three BA related issues, there is the issue of ‘Contract A’ extension
with SSA. We touched upon this briefly at the outset of these talks.
As you know, I wrote yesterday (15 October 1998) to SSA setting out the working
assumptions around our agreement around the latest ‘offer’ to ICL; ie an extension
to March 2008 between us. I am pleased to say that Chris Thompson, Chief
Executive of SSA, has called me to say, that, subject to negotiation between POCL
and SSA, he is content in principle to follow the key principles of our agreement to
date. Hopefully, this will not prove an obstacle but SSA will need briefing by BA
next week, I believe.