1.24 The option of continuing the project reflected the outcome of discussions between the government and ICL brokered by Mr Graham Corbett, then a Deputy Chairman of the Monopolies and Mergers Commission. Mr Corbett facilitated proposals that would have extended Pathway's contract by two years and improved other terms of their agreement. The Department of Social Security and Post Office Counters Ltd broadly accepted this proposal but ICL rejected it. For Pathway this would have meant a small profit from that point on, but a loss over the life of the project of around £200m. Pathway insisted that the most they could accept would be break even, and Mr Corbett informed the government in October 1998 that he had been unable to find a basis for proceeding. The government informed ICL that discussions were now at an end, but gave them time to negotiate a possible partnership arrangement with Post Office Counters Ltd.
1.25 In the period October to December 1998, ICL negotiated with Post Office Counters Ltd and made successive proposals to government. Their final offer in December 1998 brought concessions that officials estimated as acceptance of a loss of £126 million. At the same time Pathway proposed a change in the contract such that the purchasers would accept the system on the basis of technical tests and model office tests. It was not intended that a full live trial would take place before roll-out could commence. The Department of Social Security refused to accept these new terms, because they were concerned about the implications, if the system should not work, for benefit recipients, many of whom are dependent on timely and accurate payments. They were particularly conscious of the risks associated with acceptance criteria from their recent experience with the system for National Insurance Contributions (NIRS2) procured through a Private Finance Contract with Andersen Consulting. Pathway's proposal was subsequently revised such that acceptance would take place on successful completion of all tests according to a modified set of test criteria.
1.26 The numerical analysis shown in Figure 10 indicated that continuation appeared to be the lowest cost option for the public sector as a whole. But the analysis was seen against the background of continuing uncertainty about the prospects for timely delivery of the system. In practice this would have depended heavily on whether the project could be implemented against the background of growing tensions between the parties. From early 1999 Ministers became increasingly concerned about the deliverability of the project because of continuing slippage and the consequent increasing reluctance among the parties to commit themselves to it. In April 1999 officials estimated for illustrative purposes that a further delay of six months to the planned timetable could reduce the value of the deal to the public sector by up to £110 million. Ministers were concerned that the delay could be considerably longer than just six months. In early May 1999, ICL formally withdrew their December 1998 offer.