Memorandum submitted by ICL Pathway |
1. In May 1996 ICL Pathway won the tender
to computerise all the UK's 19,000 Post Offices and simultaneously
automate the system for paying DSS benefits to a total of 28 million
claimants. This was a Private Finance Initiative (PFI) project
under which ICL Pathway would design, build, finance and operate
the system, taking on all the initial risks and being rewarded
by receiving a fee for each transaction conducted over the new
system. The contract was to run until 2005; the customers were
the DSS Benefits Agency (BA) and Post Office Counters Ltd (POCL).
Contract details were due to be completed by the end of 1996 and
national installation in all post offices was to be completed
by the end of 1998.
2. ICL Pathway (initially the Pathway consortium,
since 1996 a wholly owned subsidiary of ICL) had been formed in
1994 to bid for the tender. It was selected following a lengthy
competitive bid; its subcontractors include Girobank and De La
3. One of the largest IT projects in Europe,
the proposed network is twice as large as all of the current banking
infrastructure in the UK. The project would also involve ILC Pathway
training 70,000 post office staff, and designing and integrating
the system to handle some 20 DSS benefits paid to a total of 28
million claimaints (many of whom receive more than one benefit)
at post office counters. Since billions of pounds are paid out
every year, the system had to be extremely robust and secure.
4. The new system, when fully installed,
would enable POCL to offer more services to their current and
prospective customers. A major attraction of the system was its
capability virtually to eliminate fraudulent DSS benefit encashment,
resulting in estimated fraud savings of £150 million a year.
5. As specified by the two customers in
the contract, ICL Pathway would deliver a magnetic stripe swipe
card (the Payment Card) which would gradually replace order books
and girocheques. ICL's original proposal was to issue a smartcard
but the customers maintained their preference for a "mag
stripe" Payment Card. Currently some 890 million order book
and girocheque payments are made through post offices each year.
6. In May 1996 the customers established
the PDA (Programme Delivery Authority) to oversee the project,
the PDA's 150-strong staff being formed from POCL, BA and external
consultants. In September 1996 the first 10 post offices in the
Stroud vicinity were automated with the new system and the first
benefit Payments Cards were issued for claimants to receive Child
7. The ICL Pathway system was dependent
on information received from the systems of both customers, ie
this was an end-to-end system where DSS systems would transmit
data through the ICL Pathway network to the relevant post office
(and vice versa).
8. The original contract timetable was based
on the agreement that the BA would make its CAPS database (Customer
Accounting and Payment Strategy) available to ICL for testing
in September 1996. This software and the interface specifications
were essential to ICL Pathway, to enable the establishment of
the databases for all benefits so that the ICL Pathway system
could pay the right money to claimants at the right post office
at the right time. CAPS is run in-house by the BA. However, it
subsequently emerged that it would be available only on a phased
basis and would be delayed by three years. Today, as ICL understands
it, it is still not fully completed.
9. In June 1997 the system in the first
10 post offices was upgraded to introduce barcoding of order books.
(In an earlier contract signed in 1994 ICL had introduced barcoding
on order books presented at all post offices within the M25 area,
which still runs successfully and which has led to tangible savings
in encashment fraud through the impounding of fraudulent order
10. However, in the course of 1997 it gradually
became evident to ICL Pathway that the project was being managed
by the PDA in a manner inconsistent with the principles of a PFI
as explained in guidance issued to departments by HM Treasury
and the Treasury PFI Taskforce. Although as a PFI contract a significant
amount of risk was being laid on ICL Pathway, the PDA maintained
it had a right to require ICL Pathway to behave as if this was
a conventional government procurement programme. This led to a
huge amount of senior management time being devoted to solving
the issues which were constantly being raised by the PDA. Accordingly,
ICL, POCL and BA sponsored an independent report from PA Consulting.
This concluded its Review in October 1997 and one important result
of this was the abolition of the 150-strong PDA. But a significant
amount of time had been lost.
11. In November 1997 the ICL Pathway system
was extended to a further 200 post offices in the north-east and
south-west using the benefit Payment Card to pay Child Benefit.
The technology was acknowledged as working successfully and was
well received by sub-postmasters, their staff and claimants alike.
At the same time, the BA claimed that ICL Pathway was late in
delivering under the terms of its contract. This is not the case:
a revised timescale and programme had been agreed by all parties
including the BA, and ICL Pathway was delivering to schedule.
12. In early 1998, because of what it regarded
as excessive interference and bureaucracy, ICL approached HM Treasury
to register its concern. As a result, the Treasury Expert Panel
under Adrian Montague of the PFI Taskforce was established to
assess the commercial and technical feasibility of the project.
This Panel reported its findings in July 1998, which confirmed
that technical viability of the project and the approach of ICL
Pathway. It was then indicated to ICL that relevant Ministers
would meet to consider the way ahead, but the Cabinet re-shuffle
at the end of July prevented this taking place.
13. In September 1998 Graham Corbett, deputy
chairman of the Monopolies and Mergers Commission, was appointed
by the Government as "facilitator" to determine a way
forward to meet the needs of all parties to the contract (ICL
Pathway, POCL, BA). He concluded his discussions with the parties
four weeks later. From October to December 1998 ICL Pathway held
deailed negotiations with BA and POCL, making a number of revised
proposals which represented serious concessions, in order to gain
acceptance on a commercial way forward. On 18 December ICL Pathway
submitted its final proposals which were to be presented to Ministers,
who were expected to meet shortly thereafter to reach a decision.
However, Ministerial resignations before Christmas and another,
subsequent reshuffle prevented this taking place. ICL has not,
in fact, ever received a reply to its letter of 18 December 1998
and in April 1999 formally withdrew this proposal.
14. By this time some 36,000 claimants were
successfully using the new benefit Payment Card at 204 post offices
to collect Child Benefit. Even on this relatively modest basis,
the system including the electronic scanning arrangements for
order books generated £2 million in potential fraud savings.
Throughout this period of almost constant review since February
1998, ICL Pathway continued to work on the project at a cost of
£10 million per month.
15. In January 1999 it emerged that the
BA did not wish to proceed with the magnetic stripe card, preferring
instead to make direct payments into bank accountsnotwithstanding
the fact that many millions of legitimate benefit claimants do
not have bank accounts and, because they rely on their benefits,
are unlikely to be able to open bank accounts. ICL Pathway was,
however, not informed whether Ministers collectively had decided
to dispense with the Payment Card.
16. In late January a senior Treasury official,
Steve Robson, was appointed with the Prime Minister's authority
to devise an alternative solution. ICL Pathway fully co-operated
with him. His proposed solution was to preserve the Post Office
infrastructure and eliminate the magnetic stripe card, paving
the way for the possible introduction of a smartcard and a simple
banking role for POCL. Benefit claimants would use their smartcard
to access their benefit account at the post office and the BA
would pay the benefits direct to these accounts or to an account
in a conventional bank if the claimant wished. It is worth noting
that although ICL Pathway had developed a magentic stripe card
as stipulated in the 1996 contract, ICL Pathway designed the system
to be capable of using smartcards from day one.
17. From February to May 1999 ICL Pathway
made strenuous efforts to achieve a solution acceptable to all
parties, but by May it was clear that Ministers had decided not
to proceed with the Payment Card. On 24 May the Government through
the DTI announced the revised agreement for a partnership between
the Post Office and ICL to deliver the new infrastructure but
without the BA Payment Card or a smartcard. In the meantime, a
further 100 post offices had been equipped in the run-up to national
installation of the system across the UK.
18. This submission seeks to make it clear
that, in addition to the measurable savings in benefit encashment
fraud cited above,
ICL Pathway has delivered a working
system since 1996 that has been subject to rigorous external reviews,
each of which has validated its technical feasibility.
ICL Pathway has designed a system
that would have enabled the BA fully to reconcile its accounts
(this element of the system is successfully in place for the payment
of Child Benefit at the operational post offices).
ICL Pathway has gone to very considerable
lengths throughout the duration of the project to date to find
an acceptable commercial way forward; the issue has not been the
19. Following the policy change within the
DSS to discontinue the use of the benefit Payment Card, the three
parties to the original contract have agreed a revised programme
1. The original PFI contract with ICL Pathway
has been revised so that payment will no longer be linked to transaction
volumes, reflecting the removal of the Payment Card element.
2. ICL will have a single customer, the Post
3. The fixed price contract for ICL will
run until March 2005.
4. ICL and the Post Office will continue
discussions on a Public/Private Partnership for the development
of Network Banking and "Modernising Government" services
which may be built upon the Pathway platform.
5. The electronic scanning of benefit payment
order books will be implemented on a national basis, and will
contribute to reducing benefit encashment fraud.
6. ICL will complete automation of all 19,000
post offices and installation of the IT network. By January 2000,
automation will be running at a rate of 300 post offices per week,
with the programme scheduled for completion by April 2001.
20. As a consequence of this, in line with
accountancy requirements, ICL has made a provision for £180
million in its accounts for 1998-1999, representing the cost of
its investment in the Payment Card to date. The deadline for signing
the revised agreement is 16 July 1999.
11 June 1999