Select Committee on Trade and Industry First Special Report


The Horizon Project for Automated Payment of

Benefits through Post Offices

The Government welcomes the Committee's report which it has studied carefully. This memorandum sets out the Government's response to each of the Committee's conclusions and recommendations.

Overall conclusion

(a) It is evident that a combination of factors - repeated delays and failures to reach important milestones: the demands of ICL to recoup their expenditure by either a higher transaction charge or an extension of the period during which such charges would be payable: doubts about the resilience and relative obsolescence of the technology - led Ministers to a collective loss of faith in the programme. It is however our impression that the principal factor in deciding to ditch the Benefits Payment Card was neither the cumulative delays nor technical doubts on feasibility, but the increasingly unpalatable prospect facing the Benefits Agency of paying high transaction costs for an extended period, rather than moving as rapidly as possible to ACT transactions. Everything we have heard and read confirms us in the view that the programme was blighted from the outset by the desire, justifiable or not, of the Benefits Agency to move as soon as permitted to compulsory Automated Credit Transfer: and that it finally foundered because of the reluctance of the Treasury and ICL's parent company Fujitsu to find the additional funds required once the business case of all those involved deteriorated in the face of delays. We do not fault Ministers for taking the decision they did in May 1999 in these circumstances. We have not regarded it as part of our task to come to a judgement on decisions taken prior to May 1997; it may be that the inquiry by the Comptroller and Auditor General will cast light on such decisions (paragraph 13).

The Government welcomes the support of the Select Committee for its decision in May 1999 to restructure the Horizon project.

The Government had real concerns about whether the project as originally configured would deliver its objectives for the payment of benefits. The Government was also concerned about risk to the taxpayer of further delay and cost escalation.


The combination of a three year delay to the project and the increasing numbers of benefit recipients opting voluntarily for payment by automated credit transfer (ACT) had substantially reduced the role that the Benefit Payment Card (BPC) could be expected to play. Second, a view was taken that the complexity added by the BPC could only increase the risk of further slippage of the project. Third, the technology on which the BPC was based was looking increasingly outdated. Finally, the Government's work on social exclusion had highlighted the desirability of Government action to promote the spread of bank accounts, especially among the more socially disadvantaged.

The Government rejects the suggestion that the Benefits Agency was less than wholly committed to achieving a successful outcome for the Horizon project. The decision to restructure the project without the BPC was made on the basis of benefits to the public sector as a whole and its prospects for achieving successful automation of the post office network by 2001. This in turn will pave the way for a major expansion of banking facilities in post offices in readiness for the migration of benefit payments to automated credit transfer in the period 2003-2005. Benefit recipients will be provided with a more modern and convenient way of receiving their benefits, whilst retaining the choice to access their benefits in cash at post offices through the banking facilities on offer; and ACT will provide a more secure and efficient method of paying benefits.

Reporting of problems

(b) Having reviewed the evidence given to us, we consider that a fuller reflection of the process of review which was underway, and of the serious problems with the programme, could and should have been presented to Parliament and to this Committee (paragraph 5).

The Government of course recognises the importance of keeping Parliament and the Select Committee informed on a project of this importance. However it was also of the greatest importance that all parties should remain fully committed to successful completion of the project as originally configured until the point at which the Government concluded that the project in that form had become unsustainable. To have highlighted prematurely the serious problems with the project would have risked damaging the confidence of those involved in it. There were also difficult issues of commercial confidentiality surrounding both the existing contract and negotiation of revised terms.

Choice of technology

(c) We question Ministers' characterisation of the magnetic swipe card system as "an out-dated concept" and a redundant technology; although the selection of a magnetic card rather than a smartcard in 1996 may with hindsight have proved unfortunate, it was always intended to move to a smartcard in due course (paragraph 8).

The Government has made it clear that the main factors behind its decision to reconfigure the Horizon project were that the complexity of the project continued to threaten its successful delivery so that there was an urgent need to streamline the project; and that a clear trend had emerged whereby increasing numbers of benefit recipients choose to have their benefits paid into bank accounts. The view - which the Government maintains - that delays to the project had increasingly made the magnetic strip technology look outdated was however an additional factor. One possibility might have been to switch the BPC at once to smartcard technology, but the Government was advised that this would require further development work which could have delayed the project still further.

National Audit Office

(d) It has been an expensive lesson: we hope that it proves a salutary one. Given the particular interest shown by the National Audit Office in PFI projects, and in the growing catalogue of Government IT failures, we are strongly of the view that an inquiry by the National Audit Office into the Horizon Project, using their powers to see departmental papers, would be of much assistance to Parliament: and we are confident that ICL and their principal sub-contractors would see it as in the national interest to co-operate as fully as possible. We wrote to the Comptroller and Auditor General in July to propose such an inquiry; we are pleased to record his agreement as conveyed to us in a letter of 7th September that the National Audit Office should carry out an inquiry into the lessons learned from this project focussing on risk management (paragraphs 14 and 17).

The Government welcomes the inquiry by the National Audit Office and will continue to co-operate fully with it.

Revised Post Office - ICL contract

(e) While it makes evident sense for ICL to continue with the work it has already begun, the impression remains of an essentially political deal to ensure that ICL has a substantial contract with the Post Office, at a price which seems to have been largely determined in advance of contractual re-negotiations, as a means, however inadequate, of making up some of the £180 million written off by ICL in their 1998-99 accounts. The principal concern in this new or revised contract is how it is to be financed: a matter on which the Government statements were curiously silent. The Post Office is in effect being obliged to use its resources to pay half the price of the automation deemed necessary for preservation of the national network of sub-post offices, with a real risk that it may find it difficult to recover the costs by generating new business. The Government must recognise that in setting its annual minimum dividend, particularly in the years 2003-2005 (paragraphs 18 and 19).

Given the urgent need to automate the post office counters network, the Government's concern was to achieve the best outcome for the Post Office, for the public sector as a whole, and for the taxpayer. We believe that the agreement, which was reached as a result of compromises by all of the parties, achieves that.

The Government has agreed that the Post Office can use up to £480 million of the cash assets (gilts and deposits) on its balance sheet to finance the majority of the capital costs of the project; and that the Post Office's financial targets will be adjusted accordingly.

In addition, the Prime Minister announced on 21 October that the Performance and Innovation Unit (PIU) in the Cabinet Office is to carry out a study on the post office network which will seek to identify the contribution made by post offices to the vitality of local communities; to consider how the post office network can best contribute to the Government's objectives for the future; and in the process to formulate objectives for the post office network.

The precise provision in ICL's accounts is a matter for that company but clearly reflects the significant overall loss which ICL has accepted on the project.

(f) We would welcome confirmation that the automated infrastructure procured by the Post Office will not be too highly specified for its needs, and will be capable of handling branch banking business on-line (paragraph 19).

The Horizon automated platform was specified from its inception to have substantial potential for subsequent development to meet a wide range of potential applications. One of those identified at an early stage was a facility to enable the Post Office to carry out a range of banking functions on an agency basis for the High Street banks. The Government understands that key features of this facility are scheduled to be included in the next release of software due to be rolled out with effect from autumn 2000. The detailed specifications for the technical interface between the Horizon platform and the banks will need to be determined by the parties themselves.

(g) While those concerned expressed general confidence that the roll-out of automation would proceed smoothly, and that the apparently ambitious target of converting 300 post offices a week in the year 2000 was achievable, the failure to meet the first milestone cannot but cause concern in a project with such a chequered history. We look to Ministers to inform us in response to this Report of the progress being made with the revised contract (paragraph 20).

Post Office Counters formally accepted the Horizon system in September and now expects some 1800 post offices to be automated before the end of the year. There will be an extended break in the roll-out programme over the busy Christmas period, so that they can check the system is performing well in the larger number of post offices. Roll-out is scheduled to recommence in January, building to 300 post offices every week to achieve the goal of a fully automated network by Spring 2001.

The Government has established the Horizon Working Group, chaired by Alan Johnson, Minister for Competitiveness, with membership drawn from the key stakeholders in the post office counters network; namely the Post Office, the National Federation of Subpostmasters, the Communication Workers Union and the Communication Managers Association, to monitor and oversee the successful implementation of the project and to contribute to its successful commercial exploitation.

Future of Counters network

(h) While there are obviously some difficult times ahead, and some hard bargains to be struck with a number of other commercial organisations, we are hopeful that Post Office Counters will be able to ensure the future of the network, given equitable treatment by the Benefits Agency, and other Government agencies (paragraph 22).

The day to day management of the post office network is of course the responsibility of the Post Office. It is clear that the future of the network lies above all in its continued attractiveness to clients and customers as a channel for accessing products and services, and to subpostmasters as a business proposition. The Government's decision to make a substantial contribution to the capital costs of the revised Horizon counters automation project represents a major investment in the future of the post office network.

The Government remains fully committed to the maintenance of a nationwide network of post offices. As indicated in the White Paper on Post Office Reform, the Government intends to publish access criteria which the new Regulator will have a duty to monitor and which will aim to ensure that everyone in the UK has reasonable access to post office counter services.

In addition, the transition from paper-based methods of payment to paying social security benefits by ACT will be an area to which the Performance and Innovation Unit will pay particular attention in their study described in the Government's response to recommendation (e) above.

Move to ACT

(i) We welcome the undertaking of the Secretary of State for Social Security not to take any active steps to encourage claimants to opt for ACT before 2003; we also look to him to ensure that the general benefit afforded by the national network of post offices is fully reflected in decisions by the Benefits Agency during and after the process of introduction of compulsory ACT from 2003 onwards, and that this process takes account of the needs of all claimants (paragraph 23).

The Government is pleased that the Committee welcomes the undertaking not to take active steps to move customers onto ACT before 2003. Until then, DSS will continue, in the normal way, to provide customers with the information they need on benefit payment options and customers will continue as now to be able to choose between payment by order book at post offices and payment by ACT as their preferred method of payment. It is envisaged that the migration of benefit recipients from paper-based methods of payment to more efficient and secure payment by ACT will take place over a two year period from 2003 to 2005. The intervening period between now and 2003 will enable the Post Office to install the necessary technology and reach agreement with banking partners in order to offer a range of banking services.

People are increasingly choosing ACT as their preferred method of payment for benefit and development of these arrangements will take into account the needs of all benefit recipients. The Benefits Agency and Post Office Counters will be working together to build on this trend to ensure that from 2003 ACT offers an attractive choice to benefit recipients, opening up access to a wider range of banking and other financial services, whilst continuing to offer access to cash at post office counters.

(j) The Government has emphasised the shift towards ACT in recent years. The image presented of a flood of new entrants opting for ACT is exaggerated. Fewer than one in three of new benefit recipients opt for ACT. The fact remains that, for a variety of reasons, most new benefit recipients still opt for cash in hand from a post office: and that this choice must be respected in action as well as on paper (paragraph 25).

Receiving benefits by ACT is increasingly attractive to benefit recipients, especially for long term stable benefits, with 54 per cent of new child benefit recipients and 49 per cent of new pensioners choosing to receive benefit via their bank accounts. Access to a bank account offers a number of advantages and it is important for wider social reasons that people should not feel excluded from the mainstream in this respect.

The Government believes that given developments in banking technology, including the new simple banking products now available, it should be possible to cater to people's individual circumstances and provide accounts which will answer their needs. The Government recognises that people should still be able to choose where to access their benefit cash, and if they wish to access their cash at the post office, the Government's proposals will enable them to do so.

Public sector agencies

(k) We welcome the Government's recognition of the importance of retention by Post Office Counters of Government business, as expressed in the recent White Paper. We would however also welcome recognition by Ministers that their role is not restricted to that of interested spectators, and that Government agencies have obligations and duties beyond those of purely commercial organisations. We recommend that the Government set out in their response to this Report a table showing for each Government agency contracted to the Post Office for service delivery the current position and a clear indication of Ministerial policy on future contracts: and showing progress in introducing the Electronic Government agenda as it relates to delivery of services through post offices (paragraph 26).

The post office network with its nationwide reach represents a valuable channel for the delivery of Government and other services. The early progress with the Horizon platform now in prospect should enable Post Office Counters to offer substantial enhancements to the service they are able to offer clients and customers which should increase the attractiveness of post offices compared with other channels. It is clearly important that Government Departments and agencies provide their services in a cost-effective and convenient manner, giving customers a range of choices for accessing these services. This however needs to be balanced against the importance of avoiding too sudden a change in Post Office Counters' financial circumstances with the damage that would cause.

The following table provided by the Post Office shows the status of current Government contracts with Post Office Counters. The Post Office is currently engaged in discussions with existing clients on converting paper-based products and services into electronic delivery.

Contracting Department/Agency Nature of service delivered Contract start date Contract end date

Benefits Agency

Issue and encashment of pensions and allowances

Apr 96

May 05

Social Security Agency

(Northern Ireland)

Issue and encashment of pensions and allowances in Northern Ireland

Apr 96

May 05


Issue and encashment of Green Girocheques

Apr 97

Apr 07

Department of Health

Encashment of prescription refunds and issue of milk tokens and E111s

Mar 98

Apr 00

Ministry of Defence

Issue and encashment of pensions and allowances

Jan 98

Mar 01

Inland Revenue

Encashment of Working Family Tax Credit

Oct 99

Apr 01


Issue of licences, sale and redemption of

savings stamps and electronic budgeting schemes

Apr 97

Mar 00


Sales channel for savings products

July 99

June 00


Issue of Motor Vehicle Licences/ provision

of information

Apr 99

Mar 02


Issue of Motor Vehicle Licences

Apr 99

Mar 02

UK Passport Agency

Document checking and dispatch

Jan 96

Dec 99

Department of Finance and Personnel (Northern Ireland)

Redemption of Ulster Savings Certificates

Jan 97

Mar 02

The Environment Agency

Issue of Fishing Licences

Mar 99

Mar 05

Home Office

Issue of Game Licences

No contract but a series of agreements made each year

Welsh Office

Issue of Game Licences

No contract but a series of agreements made each year

Scottish Office

Issue of Game Licences

No contract but a series of agreements running from Apr 97 to Mar 02

Post Office improvement

(l) All concerned in Post Office Counters can and must now consider more imaginatively what they can do to make the network more attractive to actual and potential customers (paragraph 27).

The Government agrees with this recommendation which will no doubt also have been noted by others concerned with the future of the network of post office counters.

As indicated in the Government's response to Recommendation (g) above, a key role of the Horizon Working Group which it has established is to contribute to the successful commercial exploitation of the Horizon project, harnessing the combined experience of the key stakeholders in the network.

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Prepared 29 November 1999