Government Banking Project -–Consultative Paper – June 2005 – Final 1

Government Banking Project

Consultative Paper

June 2005

HM TREASURY OPG

Government Banking Project -–Consultative Paper – June 2005 – Final 2

 Government Banking Project

Consultation paper

Introduction

Purpose

HM Treasury issues this informal consultative paper on behalf of the partner

departments in the Government Banking Project (“GBP”). GBP is an initiative to
deliver the future banking needs of HMRC, NS&I and OPG’s customers1 through a
single shared service provider procuring banking and transaction processing services
from commercial suppliers. It continues the informal and open consultation process
started by HMT following the PIN of October 2004 and the open presentation of 26
November 2004.

The purpose of this consultative paper is to provide potentially interested parties

(whether as bidders or otherwise), including those who have expressed interest
following the PIN, with a summary of the expected requirement, proposed business
model, banking packages and procurement process. It also provides an opportunity
to comment back to HMT via the questionnaire attached (Annex C). Such comments
will assist HMT in assessing market appetite and in moving forward to implement the
procurement project. This approach is in line with the recommendations of the OGC
Report to the Chancellor of the Exchequer of December 2003 “Increasing
Competition and Improving Long Term Capacity in the Government Market Place ”2.

Recipients are requested to provide any comments and replies to the questionnaire,
where possible by Friday 8 July 2005.

Contents

1. Recent market consultation and risk management.

2. Proposed solutions – business models, account structures and banking
packages.
3. Key business requirements.
4. Contract structure, pricing, contract period and transition.
5. Procurement process and indicative timetable.
Annex A – Transaction volumes and values
Annex B - Key stages in Negotiated Procurement – summary of actions
Annex C - Questionnaire

Acknowledgments

The project team wish to thank all those who have consulted with us, following the
PIN, for their comments.

Status of the consultative process

This consultative process, including any data or description of possible future

banking needs provided by or on behalf of HMT or partner departments, or any

1
In this paper HMRC, NS&I and OPG’s customer bodies in the public sector are referred to as
“customers” (the third party customers of each of these organisations are excluded from this
definition). HMRC, HMT, NS&I and OPG may be referred to as “departments” or “partner
departments”.
2
www.ogc.gov.uk /government market

Government Banking Project -–Consultative Paper – June 2005 – Final 3

comments made by respondents in the questionnaire or otherwise, are entirely
informal. It is intended only to provide market participants with an indication of the
requirement and the way it could be structured and procured, and to provide HMT
with an indication of market interest in the requirement. It does not commit either
HMT or its partner departments or any respondent to any particular course of action
in the subsequent procurement process, nor does it constitute a formal statement of
requirement. It is not part of or forms any kind of pre-qualification process. Any body
which subsequently expresses interest in any such procurement process shall not be
advantaged or disadvantaged by any action it takes or does not take in relation to
this consultative document. Any comments made by respondents in response to this
consultative document and questionnaire will be treated in confidence and will not be
treated as forming part of any proposal or bid that such respondent, either by itself or
in association with others, may make in response to any subsequent formal
procurement process, nor any evaluation thereof.

To ensure that all interested parties are treated fairly in the negotiating process (see
Part 5 and Annex B) the invitation to negotiate/statement of requirement will contain
all the information required to enable them to have an up to date view of our
requirement as known at the time of issue. If required there will also be a bidders
conference prior to negotiations starting which will clarify the invitation to
negotiate/statement of requirement.

Part 1 Recent market consultation and risk management

Policy and external drivers

1.1 As identified in the earlier presentation the reasons for the Government Banking
Project are:

· A number of contracts between HMRC, NS&I and OPG and their existing
banking and transaction processing and account maintenance suppliers will
need to be re-let over broadly the same timescale.
· The Bank of England’s announcement of a progressive withdrawal from
providing retail banking services to all its departmental customers including
HMRC, NS&I and OPG.
· The merger of Inland Revenue and HM Customs and Excise provides an
opportunity to consolidate their respective banking needs.
· A policy decision by Treasury Ministers to deliver the future banking needs of
the partner departments through a single shared service provider (for the
purposes of this paper “the Government Banking Agency” or “GBA”) thus
providing the opportunity to consolidate requirements in a number of key
areas.
· The opportunity to consolidate requirements across the partner departments.
· To ensure that balances continue to be made available overnight to the
appropriate account within the hierarchy of exchequer accounts at the Bank
of England in order to offset government borrowing. In future arrangements
balances may not remain outside government’s central accounts by design.

Risks

1.2 Following a series of very useful discussions with potential suppliers and further
analysis within HM Treasury on risks, the proposed business model and associated
requirements (set out later) are intended to address the following main risks:

Market Information risk. The payment and receipt flows covered by the requirement
cover the majority of the UK Government’s daily cash flows. The Debt Management

Government Banking Project -–Consultative Paper – June 2005 – Final 4

Office, part of HMT, is responsible for daily cash management operations in the
market to ensure that sufficient funds are always available to meet any net daily
central government cash shortfall and, on any day where there is a net cash surplus,
to ensure this is used to best advantage. We have determined that there is an
unacceptable risk to the DMO’s operations if a market counter party is able to see the
government’s cash flow in real time.

Single point of failure risk. Conducting all banking activities through a single supplier
concentrates our exposure to operational and performance failure risk, and reverses
departments’ dependence on more than one supplier. Any solution must offer high
levels of operational resilience, disaster recovery and business continuity capability.

Commercial and development risk. We have to balance the benefits of maximising

our flexibility to secure specific banking services from the best available supplier
against the risks in fragmenting the business and reducing incentives to suppliers to
deliver best value for money over time.

Liquidity risk. At present a significant level of receipts from third parties arrive directly
into departments’ accounts at the Bank of England. In moving to commercial banks
we are increasing our exposure to failure to move those balances in sufficient time
before close of business such that DMO is unable to complete its trading and is
exposed to unplanned borrowing costs and/or reputational risk. In order to minimise
this risk timely transfer of receipts in day will be necessary. Risk is mostly
concentrated in late CHAPS receipts and operational and commercial solutions must
aim to minimise their risk and impact.

Settlement risk and collateral. Funding and defunding arrangements via commercial
banks expose us to settlement risk. Mitigations include in-day credit limits for CHAPS
payments and using the BACS Direct Credit “Grade 3 Scheme” to settle BACS
Credits.

Part 2 – Proposed solutions – business model, account structures and banking

packages

Business model

2.1 To deliver the requirements and manage the risks set out in Part 1 we have
reviewed possible business models. We have ruled out use of a single bank for all
services for the reasons set out above. In a multibanked solution separate banking
arrangements delivered direct to some 1200 customers with 2500 plus accounts
could work, with each customer receiving and reconciling their own transaction data
from different banks to determine their overall position. This would be inefficient and
would not meet HMT’s need for monitoring in-day cash flows.

2.2 To enable a multibanked solution to work effectively in this environment we

intend to use a “service integrator” to deliver what is effectively a single unified
banking solution to customers. The service integrator combines transaction data
flows from different banks to provide customers with a single view of their accounts
and data flows; in effect ensuring that the various services required by customers are
brought together into a single point of delivery. This requires the integrator to provide
an account maintenance system that combines and sorts data flows from different
banks into a single view of each account – in effect a bank ledger system. This
system would also support data sorting and cash flow reporting (paragraphs 3.6 to
3.8 below). It should also provide a communications system for customers to receive
and view their account data remotely in real time via a browser and/or via file import
into a customer’s own business system. Any communications system should be

Government Banking Project -–Consultative Paper – June 2005 – Final 5

networkable and compatible with government and NHS intranets such as GSI or
NHSNet.

2.3 In addition the integrator’s system could provide a front end for customers to
initiate or authorise transactions remotely into the appropriate payment system,
providing a secure straight through processing capability. Transaction types might
include initiating inter account transfers, Payable Order authorisations for the security
checking database, foreign payments and CHAPS payments. Initiation or
authorisation of other types of transaction such as BACS Direct Credit files or Direct
Debit originations might flow direct from customers to BACS or might offer individual
customers the option of flowing via the integrator’s system into a bureau.

2.4 Payments and receipts clearing and settlement would be made via government
accounts at the banks (with the exception of settlement of BACS Direct Credit
payments via Grade 3 Scheme – see 3.1 below) with daily funding and defunding
flows to government accounts at the Bank of England.

Cash and data flows

2.5 The key elements of the business model are:

· Separation of payment and receipt flows from data flows to customers and
HMT,
· split payments and receipts flows between two or more commercial banks,
with instructions flowing from customers either through an integrator’s system
or direct
· consolidate data through the integrator’s system into a single flow for each
customer (and an overall flow for cash flow reporting)
· use GBA to determine the customer account structure and mapping to
commercial bank and Bank of England accounts
· ensure payments and receipts are funded or defunded directly between
government accounts at commercial banks and the Bank of England

2.6 A high level schematic summary of cash and data flows is shown below (click on
the object to open in Power Point):

Account Mappings
Receipts flows Customers
ks

Se

Data flows
Data flows
an

GB
rv

Payments flows
lB

ic

A
e
a

In

Payment
ci
er

te

Payment instructions instructions

gr
m
m

a
to

Payment
Co

instructions
Funding flow
Payment Data flows
flow

Bank of England

Pyramid accounts

Government Banking Project -–Consultative Paper – June 2005 – Final 6

Role of the integrator

2.7 The integrator’s primary roles are to:

· Provide a system of customer accounts, and an appropriate account

maintenance and transaction processing IT system.
· Manage flows of data to/from commercial banks, Bank of England, GBA/HMT
and customers – acts as information hub
· Provide the necessary communications system to deliver account and
transaction data to customers.
· Provide data sorting and files (may be shared with banks, for processing of
cheques and payable orders).
· Provide operational support to customers (shared with banks)
· Undertake error and exception processing (shared with banks)
· Account reconciliation between commercial banks, customer accounts and
BoE pyramid accounts.
· Provide a system for customers to initiate some types of transaction eg
CHAPS, internal transfers, and foreign exchange. Other transaction types eg
BACS Direct Credits, Payable Order security processing may flow via the
integrator or direct to the relevant commercial bank.
· Ensures sweeps from commercial banks to Bank of England under delegated
authority from GBA. Funding of commercial banks for payments out could
remain with GBA.
· Co-ordinate transition of banking services from current to future suppliers,
working with GBA, banks and customers.
· Working in co-operation with the banks, act as intelligent supplier to GBA and
customers to provide a single integrated banking service to agreed standards,
co-ordinating its own functions and those of the banks.
· Acts as focal point with the banks and customers to deliver service and
business development.
· Acts as focal point with GBA, customers and the banks to ensure deliver
improved efficiency and value for money for customers, developing a mutually
beneficial framework of incentives.

2.8 The precise boundary for the integrator is not defined – different combinations of
integrator and banks may drive out variations in responsibilities for daily operational
matters such as data sorting, transaction processing, customer support and error and
exception processing and in longer term service and business development and
efficiency improvements. We will use the negotiated procedure in the procurement
process to evaluate the best combination.

2.9 We have determined that the integrator may not be a bank and that no bank may
have access directly or indirectly to all data flows. However we have not determined
at present that a bank may not form a joint venture or other business relationship eg
as a supplier of software, with other supplier(s) to deliver the integrator function
provided that the risks set out in paragraph 1.2 above and any conflict of interest
issues are clearly addressed.

Role of the banks

2.10 In dividing the banking service requirements (see Part 3 below) into two or more
lots for bidding we are currently minded to apply some rules to help mitigate the risks
in paragraph 1.2 above:

Government Banking Project -–Consultative Paper – June 2005 – Final 7

 · Transactions will be separated into lots by type rather than by department or
customer grouping

· Minimum of two lots. More may be considered particularly if there is a case

for separating out individual services where there is a service proposition that
is clearly advantageous to GBA.

· An individual lot may be shared between two or more banks, provided any of
them do not also hold all or part of another lot,

· Bidders (either acting singly or in a sharing arrangement as above) must bid

for the whole of a lot.

· To minimise risk of error for third parties (eg taxpayers) all BACS Credits and
CHAPS receipts must be delivered through the same bank account(s) and
sort codes. Payable Order and Bank Giro Credit clearing could be in the
same lot.

· BACS Credits receipts and CHAPS receipts will be in a separate lot from
Direct Debit Origination and Direct Credit payments out.

· Out debit clearing (clearing of cheques received at departmental processing

centres) could be in either lot.

· CHAPS payments out may be included in either lot or let separately.

· Local banking in England and Wales, Scotland and Northern Ireland (receipt
of cheques and cash paid in by customers to local branches or via courier to
bank processing centres, crediting to government accounts at the Bank of
England), and processing of third party cash received via law enforcement
activities and holding in interest bearing accounts will be a requirement
included in one or other of the lots (but note second bullet above).

· Merchant acquiring may be in either lot or let separately.

· Foreign exchange payments and receipts is a requirement in at least two lots.

· Payable Order security processing may be included in either the integrator or

one of the banking lots.

2.11 The banks will also be required to provide operational support to customers
related to the transaction services they provide, including answering transaction
queries, tracing and error and exception processing. The allocation of responsibilities
in these areas between the integrator and the banks will need to be settled on a
pragmatic basis during the negotiating phases of the procurement process to ensure
customer needs are met effectively.

Account structure and mapping

2.12 To deliver this model without unnecessary duplication of accounts the

supporting account structure could be a “few/many/few” relationship:

· Bank of England: The Bank of England will continue to hold the government’s
central accounts within a hierarchy (the “exchequer pyramid”). The top of the
exchequer pyramid comprises the three main central exchequer accounts –

Government Banking Project -–Consultative Paper – June 2005 – Final 8

 the Debt Management Account, operated by the DMO, and the National
Loans Fund and the Consolidated Fund, operated by HMT. All government
balances must be available overnight to the DMA. Below the central accounts
and within the exchequer pyramid we will continue to hold the main
departmental accounts. In functional terms these are the HMRC General
Account(s), NS&I’s product account(s) and OPG’s concentration accounts. All
cash flows arising from customers’ payments and receipts made through
accounts at commercial banks will ultimately flow through these accounts.
We expect to define a detailed structure of a small number of Bank of
England accounts to meet these functional requirements and to map funding
and defunding flows to the three main central exchequer accounts to provide
the overnight sweep functionality required.

· Service Integrator: We expect the service integrator to provide an account

ledger system to meet the requirements of each customer for accounts (and
account hierarchies) and transaction data. No funds would flow through these
accounts but balances and transactions would need to be reconciled to the
main departmental accounts at the Bank of England and government
accounts held at commercial banks. In addition each account in the
integrator’s system would map to both these sets of accounts.

· Commercial bank accounts: We have the option of replicating each customer

account with a unique payment and receipt account held at each of the
commercial banks. However we wish to minimise the number of accounts
held at each of the commercial banks. To provide the necessary level of
granularity to sort data from commercial bank accounts into individual
customer accounts we would expect to use a combination of head office
collection accounts, sort codes and accounts. Some customer accounts such
as HMRC’s taxes accounts will have high volumes of receipts and a need for
rapid sorting of transaction data to update records. Customer accounts of this
type may need to be linked to separate bank accounts and/or sort codes.

· We will require a range of sort codes to facilitate these requirements together

with sufficient associated accounts.

2.13 A possible illustrative schematic is set out below:

C u s to m e rs B a n k o f E n g la n d
a c c o u n ts

C u s to m e r a c c o u n ts in s e rv ic e in te g ra to r’s s y s te m .
S o rts b y b a n k a c c o u n t, s o rt c o d e , c u s to m e r re fe re n c e o r c u s to m e r a c c o u n t
n u m b e r.
R e c o n c ile s to c o m m e rc ia l b a n k s a n d B a n k o f E n g la n d a c c o u n ts .

A ll ite m s A ll ite m s
file s file s

C o m m e rc ia l b a n k 1 C o m m e rc ia l b a n k 2
a c c o u n ts a c c o u n ts

Government Banking Project -–Consultative Paper – June 2005 – Final 9

(NB: this schematic does not prejudge the number of commercial banks required)

2.14 A detailed account mapping exercise is required to cover all customer accounts
and the links to accounts at the Bank of England and commercial banks. This will set
the links for each customer account and would be required for configuration of the
integrator’s system and commercial bank’s accounts system. The project team and
departments could carry out most of this work and provide it as customer supply –
alternatively the appointed suppliers could carry out the work themselves,
recognising that this process lies on the critical path for project transition.

Part 3 - Key business requirements

3.1 Our key business requirements are:

· The receipt, clearing and settlement into designated government accounts

held at commercial banks of all inward payments under UK clearing services
(including direct debits) and merchant acquiring for the account of HMRC,
NS&I and OPG customers (“customers”) and same day transfer of value to
designated government accounts at the Bank of England. Processing of
associated errors and exceptions.
· Crediting of receipts to individual customer accounts and reconciliation
· Payment processing, sponsorship, clearing and settlement of all outward
payments under UK (including Northern Ireland where appropriate) clearing
services, from designated government bank accounts held at commercial
banks and funded by GBA. BACS Direct Credit payments will be funded via
the “Grade 3” scheme from OPG accounts at the Bank of England.
Processing of associated errors and exceptions including BACS recalls.
· Debiting of payments to individual customer accounts and reconciliation.
· Provision of a system of fully functional individual customer accounts,
recording transactions and related reference information effectively in real
time. The system will need to support account hierarchies, inter account
transfers and automatic and manual funding and defunding sweeps. The
system must provide real time reporting/drill down of payments, receipts,
transaction reference information and cash flows to customers and
HMT/GBA to meet their in-day tracking requirements.
· Production and delivery in-day of a range of extract files of individual
transaction data to specified requirements to HMRC and NS&I to enable
updating of their own taxpayer or investor records systems. File formats
should meet existing specifications. In such cases the provision of extract
files may allow the option of posting file totals but not individual transaction
details to the customer’s bank accounts.
· Provision of a communications system (whether via internet browser or
otherwise) allowing all customers to view remotely their accounts and all
transactions and related reference information in real time, to initiate certain
types of payment transaction, to upload and download data directly to their
own business systems and to initiate and view searches and reports. In
addition some customers may wish to print off transaction details (eg for
CHAPS receipts). Departmental IT infrastructure and security standards must
be taken into account where relevant.
· Provision of data sorting and reporting tools enabling customers to receive
transaction data sorted by specified parameter and configured into specified
file or report formats within (in-day) timescales.
· Reconciliation of government accounts at commercial banks used for
payments and receipts, customer accounts and government accounts at the
Bank of England.
· Individual user support, processing of inquiries, tracing and problem solving.

Government Banking Project -–Consultative Paper – June 2005 – Final 10

Accounts and customer service

3.2 We will require some 2500plus customer accounts for some 1200plus customers
in the service integrator’s system. HMRC currently require some 200 accounts for
collecting individual taxes, paying benefits, paying for operating expenditure and
making revenue repayments and for holding third party monies. NS&I currently has
some 20 accounts for savings products. OPG provides some or all of the banking
needs of some 1200 customers using around 2400 accounts; the customer base
includes all government departments, the NHS, the Courts Service and some non-
departmental public bodies.

3.3 Customers may use individual accounts for all their payments and receipts or
may restrict them to a limited range of activities such as payments only sub accounts.
In addition individual accounts may be linked to other accounts in hierarchies with
inter account sweeping.

3.4 At present HMRC holds most of its accounts at the Bank of England in
hierarchies corresponding to former Inland Revenue and HM Customs and Excise
activities, together with accounts at commercial banks for some receipt and local
office banking processes. NS&I holds all its accounts at the Bank of England. OPG
customer accounts are maintained on its current contractor’s bookkeeping system,
which provides the account ledger detail underlying OPG’s three main concentration
accounts at the Bank of England in which customer balances are held. In addition
OPG holds various head office collection, operational and suspense accounts at the
Bank and/or commercial banks to support payment and receipt processing.

3.5 All customer balances in accounts at commercial banks would be defunded on a

daily basis to accounts at the Bank of England in order to maximise overnight
balances held within the exchequer pyramid. Commercial bank accounts used for
making payments (eg OPG’s CHAPS payments) are funded in day by transfers
initiated by departments from the Bank of England.

Data sorting and tracing

3.6 A requirement, especially for HMRC and NS&I, is the timely and accurate
allocation of payments made by taxpayers or investors to the correct head of duty
and individual taxpayer record or savings product. Failure to allocate receipts
accurately to records within daily operational timescales may generate unnecessary
penalty notices, loss of interest and queries, and may result in delaying the release of
imported goods or other business processes.

3.7 This overall requirement is currently met by:

· Production and delivery in-day of some 20 extract files for specified
clearings and accounts/sort codes direct to various HMRC, NS&I and
OPG contractor information systems. The extract files contain specified
fields for individual transactions, including customer reference information.
HMRC and NS&I would wish to conserve the existing file formats which
are specified for individual records systems.
· Viewing and downloading transaction information (eg CHAPS receipts)
online in real time.
· A tracing service back to the paying bank to identify taxpayers where
reference information is not included either in the extract files or incoming
CHAPS messages.

Government Banking Project -–Consultative Paper – June 2005 – Final 11

Cash flow reporting

3.8 A key requirement for HMT is the availability of real time reports on flows of
payments and receipts between GBA customer accounts and third parties. The
requirement is to show cash flows in aggregate and by certain types of transaction,
customer and business flows in order to support in day forecasting by HMT of the
government’s end of day position. This includes identifying receipts against accounts
used for individual taxes. This information is required at various times throughout the
day to support the government’s cash management operations undertaken by the
Debt Management Office. Accuracy, timeliness and confidentiality are key
requirements.

Other specific banking needs

3.9 Other banking requirements are:

· Inter account transfers. We will require a system that allows all customers to
make and receive payments same day to and from any other customer as an
inter account (“book keeping”) transfer such that no funds leave and return to
the exchequer, reducing risk and cost. Significant values are currently moved
between customer accounts on both OPG and Bank of England accounts
systems, using both paper and electronic instruction methods, in real time.

· Payable Order security checking. Payable Orders and Crossed Warrants are
cheques drawn on departments and cleared and settled through CCCL.
There is an additional security checking process to minimise losses from error
and fraud. Items lodged by presenting banks are listed in an extract file
provided by the clearing bank and compared within the timetable for CCCL
clearing with a separate database of pre-authorised items issued by
customers. The service supplier would deliver the database and checking
process. Data on authorised items would be submitted to this system by
individual customers, with the aim of moving soon to an all-electronic
submission system. Mismatched items are reviewed and incorrect, altered or
unauthorised items may be rejected through the “Claims for Unpaids”
process. We will be seeking a security checking service in respect of Payable
Orders drawn on OPG by its customers (around 10m annually for some 800
customers) and, potentially, for items issued by HMRC in respect of the
former Inland Revenue business (some 6-7m items per year). NS&I expect to
continue security checking its Crossed Warrants (between 7-10m items).
HMRC expect to continue security checking former Customs and Excise
Payable Orders (0.4m items per year).

· Clearing and settlement of Payable Orders and Crossed Warrants issued by

customers. The requirement will be for the combined total for all partner
departments (currently some 25m per year). Payable Orders and Crossed
Warrants issued by customers and drawn on HMRC, NS&I and OPG are
currently cleared by the Bank of England and settled from departmental
accounts at the Bank. The future requirement will be for clearing and
settlement upon encashment off government accounts at commercial banks.
Provision of image data could be of interest.

· Provision of services for making and receiving foreign exchange payments

(paper and electronic) from and to customers’ sterling denominated accounts.
For one off individual payments a system based on real time quotes of
exchange rates and charges from competing service suppliers would be of
interest. This requirement may also include provision of a small number of

Government Banking Project -–Consultative Paper – June 2005 – Final 12

 euro or US dollar denominated accounts. At present foreign exchange
transactions in excess of £0.5m are required to be channelled through the
Bank of England, unless otherwise agreed by HMT. This limit is under review
by the Treasury.

· OPG customers in Great Britain and HMRC (principally former C&E) local
offices across the UK will require facilities to pay in cheques and cash (both
sterling and foreign currency) and withdraw cash locally (including obtaining
sterling and foreign currency drafts), either through a local bank branch or via
courier from a processing centre.

· Facilities for receiving, counting and recording sterling and foreign currency
cash seized in the course of law enforcement activities by various agencies
and provision of interest bearing accounts to hold balances individually,
pending the outcome of enforcement actions.

3.10 Potential bidders should also note:

· Merchant acquiring – the requirement will cover the current and future
merchant acquiring needs (both for credit and debit cards) of customers. This
requirement will exclude the internet debit card payment service provided to
HMRC by Alliance and Leicester Commercial Bank. In parallel the Office of
Government Commerce Buying Solutions is evaluating how best to procure a
merchant acquiring service to make available to the wider public sector. GBA
and OGC expect to consider the options for merging these two business
streams in due course.

· HMRC receives some 20m cheques and forms and NS&I some 1m per year
directly or via local offices into their own receiving centres (such as Shipley
and Southend) where they are processed to update taxpayer or investor
records. Cheques are then delivered to HMRC or NS&I’s current suppliers for
out-debit clearing. The clearing and settlement of these cheques (but not
processing of forms) will be included in the requirement above. HMRC have
initiated a feasibility study of future processing options. Further information on
this project and any potential impact on volumes will be included in a
statement of requirement.

Future development needs

3.11 The GBP requirement is intended to provide departments with a medium to long
term supply arrangement. To be effective this arrangement will need to deliver their
future banking development needs:

· Efficiency gains – by suppliers working with departments/customers to deliver

increased efficiency and value for money over the contract life. This may be
achieved by suppliers ensuring the banking services provided continue to be
as low cost and efficient as possible by comparison with the market and by
helping departments/customers reduce their overall operating costs by more
effective use of banking services.
· Business development – work with GBA to extend its customer base and
increase business through effective joint marketing to the public sector.
· Service development - meeting customer needs for new banking services or
extending use of existing banking services into other areas of their business
(eg: opportunities to use shorter clearing cycles; wider use of direct debits,
alternative money transmission services such as PayPoint). We do not
envisage GBP extending into financial services beyond providing a shared

Government Banking Project -–Consultative Paper – June 2005 – Final 13

 service for clearing banking. Public bodies are individually responsible for
their own financial operations within general policy guidelines.

Transaction volumes and values

3.12 Transaction volumes and values by year are set out at Annex A. Volumes and
values shown for 2002-03 – 2004-05 are consolidated total figures based on outturn
data provided by HMRC, NS&I and OPG in respect of its customers. Where data is
available peak day volumes and values for 2004-05 are shown. Volumes and values
for 2005-06 and beyond are departments’ best estimates of demand based on known
business needs and plans or estimated customer use. They do not constitute firm
forecasts and are provided purely for guidance.

3.13 Choice of payment and receipt methods and transaction volumes are the
responsibility of individual customers. Requirements are determined by customers in
order to deliver their business objectives through their policies on payment methods,
which will take account of relative overall costs and scope for future efficiency
savings, both internally and from external suppliers. Any future Statement of
Requirement will indicate known policies as guidance. Suppliers will be expected to
work with GBA and customers to deliver payment method policies and help realise
efficiency gains.

Errors and exceptions

3.14 Volumes for errors and exceptions related to clearing transactions and merchant
acquiring that suppliers would be expected to process (eg BACS Direct Credit
recalls, RD cheques received, tracing receipts with incomplete or missing reference
information) are not shown. Detailed information where available will be provided in
the subsequent statement of requirement.

3.15 A GBA objective will be to reduce the incidence of errors and exceptions as far
as practical consistent with customers’ business objectives and to improve the
efficiency with which remaining items are processed.

Part 4 – Contract Structure, Pricing, Contract Period, and Transition

Contract Structure

4.1 We propose to use the following contractual structure:

· A direct contractual relationship between GBA and each of the banks,

covering all aspects relating to the contracted supply and to provide GBA’s
rights in areas such as performance management, flexibility and choice.
· A direct contractual relationship between GBA and the integrator, similarly to
cover all aspects relating to the contracted supply including the integrator’s
role in ensuring a coherent and cohesive service.

4.2 In addition the integrator, GBA and each bank would enter into three way
agreements to ensure effective delivery of a coherent service recognising that many
aspects will require coordination across multiple suppliers. This might cover both
general duties on the integrator and banks to work effectively together and with GBA,
and specific areas such as problem resolution, change control and service
development. The integrator might potentially act in some areas as agent for GBA.
This agreement is to supplement the principal obligations of the parties that will be
set out in the bilateral supply contracts at paragraph 4.1.

Government Banking Project -–Consultative Paper – June 2005 – Final 14

4.3 This approach is intended to achieve a direct contractual relationship between
GBA and each of its key suppliers, while ensuring that they work together effectively
to ensure a seamless service and provide an element of “prime contractor”
leadership.

A schematic outline of the proposed structure:

Customers

Service level agreements

GBA

Bilateral contract GBA - Trilateral agreement Bilateral contract

integrator GBA – Bank 1 - Integrator GBA – Bank 1

Service integrator Bank 1

And similarly …

Bank 2 Bank 3 etc

Pricing and allocation of business risk

4.4 We would expect to pay for banking transaction services (and related bank
accounts) on a per item basis. We will consider pricing proposals that provide an
incentive to customers to operate as efficiently as possible.

4.5 Prices will be requested on a total volume basis (see Annex A) for a particular
transaction type. Departments are expected to commit the full volume of their
requirements to the supply agreements, although they will not guarantee specific
future volumes.

4.6 For services that are not priced on a transaction volume basis GBA will consider
alternative forms of charge: for cash handling, per file, per customer account charge
and/or management or relationship fee.

4.7 All services will be monitored against agreed key performance measures and
periodic industry benchmarking to ensure standards and value for money are being
maintained.

4.8 Agreed charges would normally be deducted from customer accounts (or
redirected to another account) and paid over by GBA (ensuring the deduction is
visible to the customer for their accounting purposes).

Contract period

4.9 Contract periods are expected to be:

· Integrator – around 8 years, plus extension option in favour of GBA, subject to

periodic performance and benchmarking reviews,

Government Banking Project -–Consultative Paper – June 2005 – Final 15

 · Banking services – around 5 years, plus extension option in favour of GBA,
subject to periodic performance and benchmarking reviews.

Transition

4.10 Each department is preparing its own transition plans and ensuring their own
internal plans are resourced and prioritised. The statement of requirement will include
a consolidated programme setting out key activities. The successful bidders (lead by
the service integrator) will be expected to work with each department’s transition
team to deliver changeover for each department. The central project team will co-
ordinate the overall process and liase with existing suppliers, principally the Bank of
England.

4.11 Successful transition to suppliers under the new contracts is essential. Bidders’
transition plans and demonstrated ability to manage a smooth low risk transition in
this operational environment will be a key evaluation criterion. Further guidance will
be set out in the statement of requirement.

4.12 Current outline transition timetable is:

· Award contracts – June 2006

· Integrator initiates development, configuration and testing of account system.
· Suppliers and departments complete detailed transition plan. December
2006.
· Commissioning of integrator’s system – by June 2007
· Progressive transfer of customer accounts and transaction services (and
period of dual supply) – to end 2008
· Run off of residual paper items - early 2009.

Part 5 – Procurement process and projected timetable

Procurement process

5.1 We expect to use EU Negotiated Procedure for all lots – integrator and banking.
A summary of the key steps is set out at Annex B.

5.2 We expect that bidders will be asked to bid either for the integrator lot or the
banking lots but may not bid for both. Bidders may bid for one or more of the
banking lots but may only win one. We will evaluate bids for integrator and banking
lots separately and then evaluate the best combinations.

Projected timetable

5.3 The procedure is expected to be as follows (timetable is indicative):

· Completion of current consultation phase – early July 2005

· Publish OJEU Notice for expressions of interest to negotiate – July 2005
· Receipt of responses – August 2005.
· Issue Pre-Qualification Questionnaire – August/September 2005.
· Issue Pre-Invitation to Negotiate to shortlisted candidates –
September/October 2005
· Receipt of responses and evaluation Nov/Dec 2005
· 1st round of negotiations and shortlist Dec 2005/Jan 2006
· Issue Final Invitation to Negotiate Jan 2006
· Receipt of responses and evaluations February 2006

Government Banking Project -–Consultative Paper – June 2005 – Final 16

 · 2nd round of negotiations – March – April 2006
· Final evaluations and recommendations to Programme Board – May 2006.
· OGC Gateway 3 and recommendations to [Ministers] – June 2006
· Award contract. Issue Contract Award Notice in OJEU.
· Start transition process.

5.4 Evaluation criteria will be set out in guidance at each stage of the procurement
process. Key considerations in the evaluation of bidders’ proposals will take account
of:
· Bidder’s experience.
· Bidder’s operational capacity, competence and resilience
· Quality of technical proposition/method statement and compliance with stated
requirement(s).
· Innovative and/or alternative proposals (established though negotiated
procedures).
· Quality and performance standards offered.
· Staff/key management quality.
· Transition management proposals.
· Approach to risk management.
· Approach to management of contract, service delivery and ability to work with
other suppliers.
· Prices/basis for future prices for stated requirement and for innovative or
alternative proposals.
· Approach to future service development and delivery of efficiency gains.
· Statutory compliance.
· Acceptance of contractual terms.
· Overall judgement of relative suitability and long term value for money.

H M Treasury
June 2005

Government Banking Project -–Consultative Paper – June 2005 – Final 17

 Annex A

Transaction volumes and values

Click on the icon to open in Excel below, or see the separate ‘Annex A’ document
attached:

"Consultative doc
Annex A .xls"

Government Banking Project -–Consultative Paper – June 2005 – Final 18

 Annex B

Key stages in Negotiated Procurement – summary of actions

Task Action Indicative date

Advert Official notice published in the Official July 2005
Journal of the European Union (OJEU).

Expressions of Suppliers required to submit written July – August

interest expressions of interest. 2005

Pre-Qualification Suppliers issued with high level August 2005

Questionnaire questionnaire.
(PQQ’s) Suppliers required to submit completed
questionnaires which be subject to a
company profile evaluation, including
references and National Insurance,
Income Tax & VAT compliance checks.

Pre-Invitation to Pre Invitation to Negotiate document September /

Negotiate (PITN) issued to suitable suppliers. October 2005
Separate documents will be issued for (a)
integrator and (b) banking packages and
will include output based specifications
and key commercial principles.
Suppliers required to provide a response
on proposed methodology and initial
pricing schedules which will be subject to
commercial and technical evaluations.

PITN clarification Suppliers invited to attend first round of November –

& negotiation the negotiations for clarification of their December 2005
PITN response.

Evaluation and Evaluation Panel members meet to

short listing discuss outcome of paper evaluations
and negotiations. Proposed short listed
supplier recommendations made to
Programme Board for approval to
proceed.

Final Invitation to Final Invitation to Negotiate issued to January 2006

Negotiate (FITN) short listed suppliers and rejection letters
to unsuccessful ones.
Separate documents will be issued for (a)
integrator and (b) banking packages and
will include a detailed specification of
requirement. Suppliers required to
submit a detailed response on
methodology and pricing which will be
subject to commercial and technical
evaluations.

Government Banking Project -–Consultative Paper – June 2005 – Final 19

 FITN clarification Suppliers will be invited to attend second March – April
& negotiation round negotiations which will include 2006
discussions on detailed methodology
statement, pricing and proposed
combinations.
Because of the separate procurement of
an integrator and banks, evaluations will
consider the combinations available to
produce the best overall solution.

Evaluations Negotiation panel members meet to

discuss outcome of final round of
negotiations and to agree
recommendations for award.

Recommendation HMT recommendations submitted to May – June 2006

to award Programme Board, PGC Gateway 3 and
Ministerial consent sought.

Award Contract Award letter issued, award notice June – July 2006
published in OJEU and OGC Gateway 4.

Development and User testing, monitoring of milestones. To be confirmed

Testing
Acceptance Acceptance based on contracted service To be confirmed
levels.

Commissioning Go-live To be confirmed

Government Banking Project -–Consultative Paper – June 2005 – Final 20

 Restricted – commercial (when completed)

Annex C

Government Banking Project – Consultative Document - Questionnaire

1. Recipients of this consultative paper are invited to comment on the approach

proposed. To assist recipients we have set out a series of questions and it would be
helpful if recipients would structure their comments around them. We have provided
a general comments section for comments on any other issues not covered
elsewhere.

2. Your comments will be helpful to us in refining the business model, the roles of the
integrator and banks and account structures and in preparing the statement of
requirement in the PITN and FITN (see Annex B above). They will also help us
assess overall market interest in our requirements.

3. We would welcome any comments that incorporate alternative, innovative or value

adding proposals, and will be looking for such approaches in the negotiated
procedure we plan to use for procurement. Please note that all comments and replies
to this questionnaire will be treated in confidence.

4. When completed please return by 8 July 2005 to:

Rosemarie Barber
EFA Team
Room GC/03
H M Treasury
1 Horse Guards Road
London SW1A 2HQ

Fax: 020 7270 4365 Telephone: 020 7270 4986

Email: rosemarie.barber@hm-treasury.gov.uk

Replies may be sent by email, fax or hard copy.

Questionnaire

Name of organisation:
Contact point for clarification of replies:

General
1. Based on the description in this document of our overall requirements is your
organisation able to determine whether all or some are within its area of
business interest? If so, which?
2. Which requirements are of interest to your organisation (a) as an integrator,
(b) as a bank, or (c) in any other capacity?
3. Based on the description in this document of our overall requirements does
your organisation currently intend to bid, either alone or together with others,
as a supplier for some or all of our requirements? If so, for which
requirements?

4. Any other comments on your organisation?

Restricted – Commercial (when completed)

 Restricted – Commercial (when completed)

Part 1 - Risks
5. Paragraph 1.2: Do you have any comments on the risks as described?
6. Do you see any other risks with potentially significant impact on government
arising from movement of banking operations to the private sector? Please
comment on possible mitigations.

Part 2 – Business model

7. Do you wish to comment on the business model set out in paragraphs 2.1 –
2.6? If so please comment in the context of the risks and operational
requirements as described.
8. Paragraph 2.7 – 2.9: Do you have any comments on the role of the integrator
as described? Are there any further roles the integrator might perform? Are
there any roles which would be unattractive? If so why?
9. Do you have any comments on the role of the banks, as described in
paragraphs 2.10-2.11? Are there any further roles a bank might perform?
10. Do you wish to indicate how the banking requirements summarised in Section
3 and Annex A might be grouped together as commercially attractive
procurement packages, consistent with the rules proposed in paragraph
2.10? What are your reasons?
11. Do you have any comments on the proposed account structure and mapping
set out in paragraphs 2.12 – 2.14?

Part 3 – Key business requirements

12. Do you have any comments on the requirements set out in paragraphs 3.1,
3.2 – 3.5, 3.6 – 3.7, 3.8, 3.9 – 3.10, 3.11, 3.12 – 3.13, 3.14 – 3.15 from the
perspective of (a) an integrator (b) a bank? What are the key areas of
information would you want to see in the statement of requirement?
13. Annex A - What information on transaction volumes, values, peaks/troughs,
errors and exceptions, account structures, data sorting, performance
standards and timings would you require to assess and price a bid?

Part 4 – Contract structure, pricing, contract period and transition

14. Do you have any comments on the contract structure as set out in paragraphs
4.1 – 4.3, pricing and allocation of business risk in paragraphs 4.4 – 4.8, and
contract period in paragraph 4.9? Would you prefer a “prime contractor – sub
contractor” structure instead, with a single contract between prime contractor
and government?
15. Do you have any comments on the transition process and timetable set out in
paragraphs 4.10 – 4.12? What are the key transition issues for your
organisation and what information would you require on customers’ transition
requirements in the statement of requirement?

Part 5 – procurement process and projected timetable

16. Do you have any comments on the EU Negotiated Procedures procurement
process as set out in paragraphs 5.1 – 5.3 and Annex B?
17. Do you have any comments on the process outlined in paragraph 5.2 of
selecting integrator and banks separately and then evaluating potential
combinations to secure the best overall solution?

Other
18. Any other comments you wish to make, not covered elsewhere?

Restricted – Commercial (when completed)

Government Banking Project -–Consultative Paper – June 2005 – Final 22