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PO BOARD MEETING 19/20 TULY 1999
BA CONTRACT NEGOTIATIONS-BACKGROUND BRIEFING
1. Contract Terms and Conditions
11 BA Position:
BA claim to have a negotiating remit from their Minister that is based on the
assumptions in the KPMG modelling exercise which was used to inform
Ministers on the value for money of the various options being considered
around the future of the programme. Principally these are:
- a price for the Order Book Control Service based on the previous
contract with ICL. This was a marginal price that resulted in income
to POCL of c £103m over the life of the contract. The charging
arrangements from which that price was derived do not exist
anymore. .
- loss of the minimum guaranteed payment mechanism in the current
contract between POCL and BA (KPMG assumed this disappeared
from 2003/4 when compulsory ACT came in. However BA maintain
this was meant to be with immediate effect). This would reduce
POCL’s income over the life of the contract by at least £200m. There is
also a risk that with the removal of the minimum guarantee payment
immediately, BA would actively and possibly covertly seek to transfer
payments to ACT and reduce volume through POCL - this despite
Ministerial assurances to the contrary.
- It is worth noting BA’s position, that their Minister does not want
to be responsible for the funding of the Post Office/ Network.
- BA also maintain that their Minister was asked to state what level of
payment he could support, by Treasury Ministers, at the time that the
decision was made about the future funding of the programme and he
used the KPMG numbers. (It is quite clear from the notes in the KPMG
report, that BA provided the assumptions that were used in the
modelling of the option we are going forward on - in isolation from
either POCL or ICL. Furthermore it is also clear that KPMG tempered.
some of those assumptions i.e BA wanted to reduce POCL’s fixed price
when the move to ACT started) BA therefore say they do not have the
funds to pay any increased charges.
12 POCL position:
- POCL claim that as a result of the revision in contracts - arising out of
the termination of the Payment Card - the cost of providing automated
services has increased. It is looking to BA to pick up its fair share of
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costs for the OBCS services which use up a very significant share of
system capacity etc. POCL is seeking c £300m for this service over the
life of the contract. (The difference between our positions on price is
£200m) If BA do not pick up a fair share of the costs then in effect they
are being subsidised by the Post Office!
- On the issue of the minimum guaranteed payment disappearing with
immediate effect, POCL have pointed out the inconsistency in BA’s
arguments that this was a KPMG modelling assumption.
- POCL’s position is that BA should honour it’s current contract which
includes the floor till 2005. Furthermore the floor was part of a pricing
package (ie generous RPI-x) over the life of the contract and if BA wish
to re-open this element of the contract then the whole package needs
to be reviewed. Without a clear understanding of BA’s ACT plans it is
not possible to understand what the implications are for POCL in
terms of infrastructure costs. The floor provides some stability.
2 Acceptance
2.1 BA Position:
- BA want to mirror POCL’s contractual position with ICL on
Acceptance/roll-out (and service provision) in their own contract
with POCL.
2.2 POCL’s Position
- POCL accepts entirely that BA ,as a customer for OBCS, must be able to
satisfy itself that the service meets its requirements and is fit for
purpose. However the model it would prefer to use is one which it has
already adopted successfully with BA in the past for the ALPS/ESNS
service as well as its other Bill Payment clients i.e client requirements
are specified and POCL provides evidence and assurance that those
requirements are met involving the client where necessary. The
contract is managed through Service Level Agreements and there are
penalties within that for failure to perform.
POCL feel that in seeking to replicate the Acceptance arrangements
that were previously in the ICL contract (some of which have changed
since codification) and asking for the same level of protection that
POCL has from ICL in terms of remedies, liquidated damages etc, BA
is wanting to retain the privileges of being a Contracting Authority
without any of the costs and risks. Furthermore OBCS is far less
mission critical than the Benefit Payment Card. However BA may try
to talk it up, OBCS is an electronic stop notice facility. They should not
therefore have the right to demand assurances about all aspects of the
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ICL system and its operation on the basis of their paying POCL for this
service.
- There is also some evidence from the demands we have had from BA
- in terms of Acceptance - that they are attempting to increase their
requirements so as to make the service replicate some of the benefits of
the Payment Card. POCL has made it clear that any change in
requirements needs to be dealt with under change control procedures.
- The obligations that BA’s approach on Acceptance would place on
POCL could result in increased costs and liabilities and also allow BA
the opportunity to interfere in the acceptance process where all the
risks of increased costs and delay to Programme time-scales are borne
by POCL. As an illustration were to accept BA’s proposals, a worse
case scenario might be one where POCL accepts the whole service from
ICL, but in its mirror acceptance process with POCL, BA refuse to
accept the OBCS service thus placing POCL in an invidious position
ona decision to roll-out. If POCL did so at its own risk, BA could
refuse to pay for the service and claim damages from POCL for failure
to complete the operational trial successfully.
3. Current Position
The impasse on the negotiations in terms of the price for OBCS and
removal of the floor has been drawn to the attention of Ian McCartney.
through the Committee he chairs and at his request we have written to
him to brief him on the position and seek his assistance. He has written
to Alistair Darling who has agreed to a meeting.
We have not asked the Minister to negotiate a deal- simply to ask
Alistair Darling to remove the self imposed financial constraints
on his team so that a proper commercial negotiation can be conducted
between BA and ourselves. However there is always the risk that he
will attempt to a deal and therefore careful briefing will be provided.
In the meanwhile, the Board should be made aware of the above and
hopefully they will support our stance that:
(i) _ BAshould not be granted contractual status on Acceptance that
exactly replicates that between POCL and ICL and;
(i) Ifmecessary and Ministers are unable/ unwilling to help and BA hold
. out on paying a fair price for OBCS, POCL can refuse to provide the
service when it rolls out. It will be important to be able to demonstrate
that POCL is serious on this point if we are to get any movement.
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