Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  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 million[1] 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 you want.
  (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.

Mr 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

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