APPENDIX 1
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
|
Girobank |
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
|
BBC |
Issue of licences, sale and redemption of
savings stamps and electronic budgeting schemes
|
Apr 97 |
Mar 00
|
DNS |
Sales channel for savings products
|
July 99 |
June 00
|
DVLA |
Issue of Motor Vehicle Licences/ provision
of information
|
Apr 99 |
Mar 02
|
DVLNI |
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.
| 
