1.27 With outright cancellation the contract with Pathway would have been completely abandoned and progress towards the automation of the Post Office halted. In order to retain Post Office Counters' customer base, the Department of Social Security would have been required to continue to pay beneficiaries through the paper based order book system until such time as Post Office Counters Ltd had the capability to offer customers a facility to draw cash from their bank accounts.
The estimated net value of the options considered by the government prior to cancellation of the Payments Card project | Figure 10 |
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The financial evaluation of options was a forward look produced in mid 1999 showing estimated cash flows between then and 2010. It indicated that continuation of the contract would give the best overall return to the public sector, assuming no more than six months further slippage and acceptable revised terms being agreed between the parties. | ||||||
| Public Sector Body | Full Continuation Net Present Value | Full Cancellation Net Present Value | Partial Continuation The terms agreed with ICL Net Present Value £m2,4 | ||
| Department of Social Security (1) | +1,477 | +1,990 | 1958 | ||
| Post Office Counters Ltd | -361 | -1,447 | -1406 | ||
| Overall net value to the Public Sector | 1,117 | 543 | 552 | ||
| Notes: 1. The figures for the Department of Social Security include the net benefits of options over the period up to 2009/2010 and should not be compared directly with those in Figures 7 and 11 of this report which cover different periods. 2. Positive numbers are savings compared to the existing arrangements; negative numbers are losses. This figure shows net present values (at 1998-99 prices) of the main options considered by the government. The evaluation compared the options against a "business as usual" baseline which assumed the continuation of payments by order book and girocheques. The analysis was purely financial and under the continuation option excluded outstanding contractual issues (principally around acceptance testing), the risks of further slippage in addition to the six months already factored into the figures, and in the wider context the increasing trend towards payment of benefits by ACT. 3. Cancellation was likely to lead to litigation. This option incorporated possible litigation costs. Although the purchasers considered they had a strong case against Pathway in which they could sue for damages of up to £200 million, they recognised that there was likely to be a counter claim from ICL in respect of Pathway's abortive project costs. Pathway told us that they too had a strong case. On the basis of legal advice, the Treasury reflected on these factors when costing the cancellation option. | |||||
Source: Analysis by consultants KPMG for the government | 4. The figure highlights the terms for partial continuation agreed by the government and ICL on 21st May 1999. The precise allocation of some of the costs under this option was considered in the re-negotiation of the service contract between the Benefits Agency and Post Office Counters Ltd. Post Office Counters' position worsens under this option mainly because they sustain progressive loss of benefit payment business from 2003, and because of the higher up-front cash requirement of the revised deal. | |||||