Examination of Witnesses (Questions 1
MONDAY 26 FEBRUARY 2001
1. This afternoon the Committee is considering
the Comptroller and Auditor General's Report on the Cancellation
of the Benefits Payment Card project. We have as witnesses Rachel
Lomax, the Permanent Secretary at the Department of Social Security,
Mr Derek Davis, the Director of Consumer Goods, Business and Postal
Services at the DTI, Mr Tony Oppenheim, Director of Commercial
and Finance at ICL Pathway and Mr John Roberts, the Chief Executive
of the Post Office. Welcome everybody. For those of you who are
not used to our proceedings, I will try to give some indication
before each question as to which part of the report I am referring
to so that you can at least be able to pick up on that. Ms Lomax,
you are familiar with the procedure so I will start with you if
I may. Welcome. The first question relates to paragraph 31 and
Appendix 5, or perhaps a little wider than that in truth. This
Committee has investigated many IT project failures in recent
years, it is about 40 now, but this is probably the largest and
one of the most costly that we have seen. How would the new guidance
from the Cabinet Office have ensured that you succeeded in this
project rather than the outcome we see before us?
(Ms Lomax) In lots of different ways
I think, Chairman. First of all, I think that the project was
vast in scale. It involved automating the Post Office for the
first time ever. It involved restructuring the DSS's back end
computer systems and then there was the Benefits Payment Card
itself. I think it inconceivable that nowadays such a project
would not have been broken down into more manageable chunks, that
is the first thing. Secondly, I think that if it was not a PFI
project we would have approached it rather differently. I think
that more time would have gone into developing any technical design
together with the supplier before we went to try to build the
project. There would certainly have been an independent review
through the gateway process, the McCartney review, before we got
to contract, which would have insisted that we did that. Thirdly,
we would have had a much more shared and open approach to risk
taking throughout the life of the project. I think we would have
approached it much more in a partnership spirit. This was one
of the very early PFI projects and there was very much more an
emphasis of allocating risks and arms' length dealing between
suppliers. I think this project has been one of the ones which
has emphasised the need for a collaborative approach to solve
problems as they come up. Then, finally, I am sure there are lots
of other things as well, I draw attention to the acceptance process.
I think that we would avoid a sort of big bang acceptance where
you either have to say "yes, this system is ready for national
roll-out" or "we must progress more", we would
have a phased acceptance process. I think those are the big things
that I would highlight.
2. You have pretty much answered my next
question which is what you would do to improve the process. From
what you have said you have picked up most, from memory, of the
suggestions that we would have made from our own report of January
of last year into the IT project and the C&AG's report that
went with it. I will move on, others may want to pick that up.
My next reference is paragraphs 1.18 to 1.28, quite a long group,
that tells us that even under the old arrangements it took 18
months to devise a new way forward, and in all that time abortive
work and costs were increasing. They must have been quite spectacular
costs that were slipping out of the door. Why did it take so long
and how would you try to reach the joined-up Government decisions
more quickly in future because over 18 months it must have been
very expensive in all sorts of ways?
(Ms Lomax) I think the length of time does reflect
the importance of the issues at stake as well as their complexity.
You are talking about every post office in the country and 28
potential benefits claimants, huge sums of money and a project
which was seen as cementing the way forward for the Post Office
as well as producing a fraud free system of payment for the DSS.
The big issues at stake involved a number of Government departments:
DTI as the sponsor of the Post Office and the Treasury and No.10
got involved as well as the DSS. We all had quite legitimately
different approaches to all of this. Also, the commercial issues
for ICL, which was coming up to flotation, were also very big
and very significant and needed to be taken seriously. We went
through a long process of different kinds of review, inter-departmental
groups, a long period of negotiation trying to find a way forward.
I can take you through each stage of it but, I think you are right,
18 months was a long time considering the issues at stake and
the difficulty of finding a way forward even from now on was what
the subject deserved.
3. Did it not also reflect the fact that
a number of parties involved really had a different view of the
problems and even different aims?
(Ms Lomax) I think that there were legitimately different
interests at stake here. All the parties to the project signed
up to the same objectives, the same four objectives, of what the
Benefits Payment Card was about. We all had different primary
drivers. The DSS was interested in a fraud free means of payment,
the Post Office wanted to secure our custom and was interested
in securing footfall in local post offices. When things are going
well these differences in what is your main driver perhaps do
not matter, but when things start to go wrong and there are difficult
choices to be made these things need work.
4. I am sure others will pick that up. You
mentioned the future. When cancelling the Card project, the Government
said that people who wished to continue to collect their cash
at post offices would be able to do so, paragraph 1.29. What arrangements
are planned to ensure that all your customers, especially those
in rural areas, will be able to claim their cash without excessive
travelling and inconvenience? What assurances can you give the
Committee on this?
(Ms Lomax) The Prime Minister has given the assurance
that people who want to collect their payments in cash from post
offices will be able to do so and I cannot improve on that. The
actual means by which this assurance is going to be delivered
is still under development and under discussion. The Universal
Banking Service, which the Post Office is going to offer, is the
primary vehicle and, as presently conceived, this consists of
two separate elements, a basic banking service where the post
office will be acting as agent for other banks, and a basic card
account. I think that the second part of your question is about
the network of post offices through which people will be able
to access their benefits and that is a broader question really
than I can deal with so I would like to hand it over to Derek
Davis, if you do not mind.
5. I will come to Mr Davis in a minute because
I will raise with him this question of the Universal Bank and
perhaps he can pick it up when we get to that point. If that is
as much as you can tell us today I may well be asking for a note
on this issue at the end because we expect rather more certainty
on this issue than we have so far. Can I turn for a second to
the TOA. We see in paragraphs 25 and 26 that the Department and
Post Office Counters selected ICL to supply the system even though
they had greater confidence that the other two bidders could deliver
it. They did this because only ICL's bid complied with the PFI
that the Treasury laid down. What lessons have the Treasury drawn
from this about how PFI should be applied?
(Mr Schofield) I think the key points are set out
in the guidance that the Treasury put out in early 2000 which
addressed the whole issue of how we go about PFI for IT projects,
many of which are set out in the lessons learned in the NAO Report
and in the annex.
6. That does not surprise me because the
Department took on board what was in the NAO draft report.
(Mr Schofield) I think in that sense the Treasury
has learned and is applying those lessons in that way. In terms
of the way in which PFI has developed over the period since this
contract was entered into there are a number of very key points.
First of all, there is that guidance. Second, the guidance that
was put out by CITU in May 2000. Third, I think the gateway procedure
that Ms Lomax has already referred to. Fourth, the additional
expertise which is now available, for example within the OGC,
as a result of various changes made since May 1997.
7. Okay, again others may ask more about
that. My next question is for Mr Oppenheim. Good afternoon. It
relates to paragraph 3.14 which tells us that the Department and
independent reviewers both suggest that Pathway underestimated
the extent of new software to be developed, and ran short of resources
to develop it. Can you tell us what lessons you have learned from
this project about fully understanding the requirement?
(Mr Oppenheim) Yes indeed. The guidelines which have
been produced are, in fact, very much in line with our own discovery
from this experience which really is that we have got to be very
clear at the beginning as to the requirements and not enter into
fixed price contracts and in particular fixed timescales before
those requirements are very clearly expressed, particularly when
there are two parties and they are of such considerable complexity.
We were dealing here with legacy systems, with processes which
are vital to the smooth running of society, and unless they are
very well specified then one is going to run into problems. We
fully support the notion, as Ms Lomax said, of having an initial
phase of defining requirements, and we would very much like to
be involved in that, and solutions, before as it were, firing
the gun and going forward on the PFI delivery.
8. Thank you. Mr Oppenheim, I think you
could take your evidence just there and frame it and give it to
every software supplier in the country, it would be quite functional.
Thank you very much. We will move on to Mr Davis, the DTI. Paragraph
1.40 is the one I am referring to. The Department's note to the
Committee outlines the progress made with the Post Office and
the banks in developing suitable bank account arrangements for
benefit claimants. What further steps are now needed to agree
the terms on which benefit customers will be given bank accounts?
(Mr Davis) This is the Universal Banking Services
you are asking about?
9. What I asked you was what further steps
are now needed to agree the terms on which benefit customers will
be given bank accounts? You can roll in the Universal Bank if
(Mr Davis) We have made quite a lot of progress towards
getting the Universal Banking Services in place. We reached an
agreement in principle last December with six of the major banks
and we are now very close to signing a memorandum of understanding
which will be the key underpinning for putting in place the Universal
Bank. We will then have to carry out the detailed work on the
operational systems that it will involve. The object is to have
it fully up and running well in advance of the change over in
2003. The main components envisaged for the UBS are, first, a
post office card account and, secondly, basic bank accounts, or
PAT 14 accounts as they are known, and, thirdly, the Post Office
already has, and will be seeking to enlarge, arrangements for
availability of current accounts at post offices. So all these
will provide channels through which cash can be obtained at post
offices when we have the system fully up and running.
10. Your answer tells me that this depends
entirely on the success of the Universal Bank, which is mentioned
in paragraph 1.43. That bank will require public money, government
guarantees, or both. Will you be making proper arrangements for
public accountability to Parliament for this new entity, particularly
by ensuring access rights for the National Audit Office, the Comptroller
and Auditor General?
(Mr Davis) That will certainly be our intention as
far as the public financing aspects of the UBS are concerned.
11. I almost enjoyed your answer until you
said "as far as". What does that mean?
(Mr Davis) What it means is that when we come to putting
the arrangements in place there are likely to be elements of public
contribution into the Universal Banking Services and that the
Departments involved in those contributions will be fully accountable
in the normal way.
12. Are you happy with that, Comptroller
and Auditor General?
(Sir John Bourn) I think it would be helpful, Chairman,
if as this develops we could discuss with the Department what
it actually means. It is encouraging and I note what the witness
has said about the intention to seek proper access.
13. My concern is not just about the money,
my concern is about the provision of a public service.
(Sir John Bourn) Yes, that too.
14. On that issue, could I just come back
to Mr Roberts on the Post Office. I understand that while the
NAO had access to certain documents on the Post Office's involvement
in the project which were held by other parties, you did not provide
them with access to your own records and declined to give them
information, even in meetings. Why was that?
(Mr Roberts) Chairman, we discussed this two weeks
ago. The National Audit Office does not have
15. Who is "we" in this context?
(Mr Roberts) You and me and the rest of the Committee
when we were here two weeks ago in the context of the last Audit
Report. The National Audit Office does not have access to us.
I think we provided answers to every question that was put to
us via the DTI as our representative in Government. We arranged
for them to see the terminals in operation. I would not want you
to think that "lack of access" meant lack of co-operation
because I think we co-operated with everything that we were asked
to do. In fact, I think in one of the letters the NAO said thank
you for the co-operation they had had so far. As we go from there,
I think it is back then to the point that you were raising with
Mr Davis which was around what does Government want to do. If
the Government wants the NAO to have full access to the Post Office
then I think that is a matter for Government to decide. Successive
administrations have decided that that is not what they want.
If that is to change then obviously the Post Office will respond
to it but at the moment, in the same way as I would not allow
any other company's auditors access to the Post Office, I have
taken that line with the NAO.
16. On the basis of?
(Mr Roberts) We are not part of Government, we are
a separate corporation. We have independent external auditors.
We have accountability to DTI. We have accountability to the Government
in terms of financial targets. We are going to have accountability
to the regulator from the end of this month. We have accountability
to the Select Committee for Trade and Industry. There are a vast
number of ways in which the Post Office is held accountable and
all of those have been approved by Government over the years and
the NAO, in terms of access, has not been one of those.
17. Accountability is only as good as the
information provided and you are here responsible for providing
a public service.
(Mr Roberts) Yes.
Chairman: Okay. I think we will be coming back
to that issue at some length. Let us widen it out. We will start
with Mr Gerry Steinberg.
18. On page 81, Ms Lomax, there is a chronology
of the events that led up to the eventual contract. It obviously
had been going on since about 1988 but, in fact, by May 1994 the
then Secretary of State announced to the National Federation of
Sub-Postmasters the intention to move towards a new automated
system for paying benefit. Then in October 1995 the Secretary
of State made the announcement that the Benefits Payment Card
would be introduced in 1996. In May 1996 Pathway were given the
contract which stated that the trial would be finished by June
1997 and the roll-out was to be completed by 1999. Then the Secretary
of State announced again in May 1996 that it was going ahead.
If we look at page 46, paragraph 2.14, and read the first three
lines, it was all pie in the sky, was it not?
(Ms Lomax) I think that it was clear by what
19. It was never on the cards, was it?
(Ms Lomax) I do not think that was what people thought
at the time. I think that with the benefit of hindsight they did
seriously underestimate the scale and the complexity of the job.
1 Note by Witness: There are 28 million benefit
accounts and 22 million people in receipt of benefit. Back