3.4 Having rejected Mapeley STEPS initial proposals, the Departments acknowledged that there was an issue to be resolved and agreed to work with the contractor to understand the extent of the contractor's financial problems and to consider what options were available.
3.5 The Departments set up a working group to analyse the situation and appraise the available options. The working group was chaired by Partnerships UK and comprised Deloitte & Touche (financial advice), Lovells (legal advice), and the Departments' Estate and Contract Management Unit. The group reported to the Inland Revenue Board in January 2002. At that meeting the Board asked for further work to be done to gain a better understanding of Mapeley STEPS' finances and the protections the Departments had if the contract did not continue.
3.6 The Departments subsequently appointed Rothschild to report on the situation alongside the working group. The appointment was made to help prevent any conflicts of interest arising within the existing working group, all of whom had advised on the original deal. Rothschild's report concluded that the original deal, signed in April 2001, was at a good price and that it was in the Departments' interests to continue with the deal. Although Rothschild was unsure how robust the contractor's figures were, it was clear that without significant injections of capital or additional support, there was a risk of Mapeley STEPS Contractor Limited becoming insolvent. The report recommended that the Departments should look for solutions that kept the senior debt provider (HBOS) in the deal, since the bank brought a monitoring role to the deal. Rothschild also recommended that the Departments should develop a full understanding of Mapeley STEPS' underlying business dynamics and conduct a thorough review of the implications of termination, and of the management of the STEPS deal, in order to be clearly forewarned of any further problems.
3.7 Following a meeting of the Departments' Chairmen on 1 May 2002, further work was commissioned from the working group. The Chairmen recognised the risks of a Mapeley STEPS' collapse and the operational reasons why the working group should continue to investigate the prospects of reaching a successful conclusion. The Departments considered that, without a settlement, there was a risk that Mapeley STEPS might fail financially. This would result in operational difficulties, litigation, and the loss of the expected cost savings in the deal. The Chairmen also believed that it was crucially important to get a better understanding of the consequences of the contract coming to a premature end and that contingency work should be carried out to explore exit options.
3.8 At this stage Mapeley STEPS approached the Departments seeking reassurance about the likely outcome of discussions with the aim of sharing this with the bankers and auditors. The Departments sent two letters to Mapeley STEPS on 27 June and 24 July stating that negotiations were ongoing and that any final settlement would be subject to approval. These letters were accompanied by a draft memorandum of understanding that would form the basis of the ongoing negotiations. The Departments were subsequently advised by the Treasury Officer of Accounts that the letters may constitute letters of comfort. No money was paid over to Mapeley STEPS as part of this process and there is no contingent liability.