Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



  20.  Underestimate might be a slight exaggeration, I would have thought, because the Department signed the contract and they had no idea of the risks that they were taking. It says: "The Department took only limited steps to evaluate this risk before signing the contract. Their May 1996 business case included no analysis to assess its sensitivity to major slippage in the project..." In other words, the contract was signed and it was all pie in the sky.
  (Ms Lomax) I think at the beginning when I said that I thought more work ought to have been done, I was talking about the work between procurement and the building of the system. The work that was done up to procurement, I think the NAO says elsewhere in this report, was competently done, the risks were identified at that stage, it is just that it should have been followed through for a fixed price contract with much more detailed work. I think the work that was done was inadequate for the purposes of the PFI, then a very novel way of doing a contract of course.

  21.  So it was a very clear contract?
  (Ms Lomax) This must have been one of the very first Private Finance contracts in the world.

  22.  With great respect, it is irrelevant whether it was the first PFI contract or not. The fact of the matter was you were going into a business contract with the Post Office and Pathway, as it turned out to be, and clearly the contract was totally unclear. If you turn to page 52, paragraph 3.7, and read perhaps the first four or five lines, and I do not want to repeat them, you can see clearly 289 agreements to agree, 124 with Post Office Counters, 127 with both clients jointly. You were going into a contract with three of you and you had not got a clue what you were going into. No wonder it failed.
  (Ms Lomax) No, I do not think I can accept that and I do not think that the NAO Report supports that interpretation either.

  23.  The end result proves it though, does it not?
  (Ms Lomax) With great respect, the fact that it was an early PFI did make a difference. This was a fixed price contract and the risks involved for the contractor were much greater. You do need more pre-contract work for a PFI than you would for a conventional procurement.

  24.  It does not matter whether it was a fixed price contract or whatever it was, at the end of the day the Secretary of State announced in 1996 that by 1999 the system would be up and going but it was never anywhere near up and going.
  (Ms Lomax) I think it is clear to say that all sides acknowledged that they had seriously underestimated the scale and the complexity of the task and that was why the whole thing was fundamentally re-planned in February 1997.

  25.  I want to come on to that.
  (Ms Lomax) To that extent what you are saying has got some substance. I do not think it is true to say, therefore, that the procurement was incompetently done and no-one took any notice of risks because it says in the NAO Report that they did, it just was not adequate for the scale of the task.

  26.  That admission to me clearly is pathetic, to be quite honest, because at the end of the day a huge project that you were going into was never, ever delivered, not even a small part of it. Can I ask the three organisations why they went into a contract that was unclear. Why did you, as the contractors, go into a contract that was totally unclear?
  (Mr Oppenheim) Let me try to answer that. It was not totally unclear. There was a great mass of definition but some vital elements were missing. As we have all stated before, we would now look to get that definition phase done at the beginning. There was a kind of honeymoon period around the PFIs at that time, for want of a better description, where people were looking for quick results and there were a lot of assumptions made, probably by all three parties, as to what they were going to get out of it. For our part, why did we go into such an aggressive timescale? We assumed that there was a mood for compromise on some of these yet to be agreed requirements. We believed that we were given comfort in those assumptions because of the time of the essence timescales which were impressed upon us. I am sorry if I am taking time. The consequence of that was that we expected there to be room for manoeuvre, we were encouraged to think innovation and enterprise and those kinds of things but what we actually found was that there were a lot of things that were fixed that we could not move for a variety of reasons that we did not really understand at the time.

  27.  Okay. So you went into a contract that, frankly, you were unclear about. Why did the Department go into a contract when I cannot find anywhere in the report where it clearly states that the contractor was given any assurance of delivery? I cannot see anything in the report which states that Pathway, or whatever they were called, were actually going to deliver, there were no assurances.
  (Mr McCorkell) At the stage the Department entered the contract it was based on an extensive procurement process where something like 400 business requirements were defined. They were defined at a high level and the PFI philosophy at the time was precisely design your business requirements at a high level, allow the contractor to create the solution, do not constrain them with the detail. This is the major lesson we have all learned about PFI, that that just does not work.

  28.  You keep blaming the PFI, but at the end of the day whether it was a PFI, whether it was in the private sector solely or whether it was in the public sector solely you want a successful conclusion to the project. It does not matter who is delivering it, that is what you want, and there were never any indications that was going to be the case. Why did the Post Office get involved when there were no assurances at all?
  (Mr Roberts) I think in any contract like this what you are committing to, and what ICL Pathway were committing to, is to produce a system by a particular time. I think when we started the intention was that the system would be rolled out by the end of December 1999. The contract within the terms of PFI, and I agree with what else has been said about PFI—

  29.  You would.
  (Mr Roberts) I think that was quite clear. It was clear in the sense that we knew what we were signing. PFI at that stage was very much about the transfer of risk. If one looks to the guidelines that were being turned out at that stage on PFI, they were all stressing that this risk was passed over to the supplier. We were not quite specifically allowed to—

  30.  As long as the risk gets passed over it does not matter whether the scheme fails or not?
  (Mr Roberts) No. The whole point of passing over the risk is obviously one is making an assessment of what risk you are passing over. Do remember, we were being asked specifically not to design the answer and that was very unusual. In any contract prior to that that I had been involved with, the first thing that you do is you try with the contractor, with the supplier, to sit down and define as closely as you can what you expect to get out of it. That was not the intention of PFI at the time through the instructions, it was very much around "you must have a high level view of what you are trying to do", which we did, we wanted to automate the post offices, we wanted to automate the benefits payments. The methods that were then used to do that under the PFI instructions were down to the supplier to come back with suggestions for doing it. That was the way, I think, at the time that it was supposed to encourage innovation from the supplier.
  (Ms Lomax) It is still the case that PFI is about specifying what you want from the service, not how it is going to be delivered. We know that to have an arms' length black box approach to that does not work, you need to work together on the how in order to get the what right.

  31.  Your Department wanted a scheme which was going to combat fraud and this was not even written into the contract.
  (Ms Lomax) I am sorry?
  (Mr Oppenheim) Excuse me, it was.
  (Ms Lomax) It was.

  32. Not according to the report, it was not. As I saw it in the report, the purchaser wanted a particular scheme to combat benefit fraud and yet this was not agreed in the contract.
  (Mr Oppenheim) A lot of it was specified in the contract but there were fine details and the devil turned out to be in the detail. The notion of an extended verification procedure in order to target specific verification, via authentication methods was written into the contract. The detail of how that was going to be done, how it was going to be targeted, the processes, were not, and resolution turned out to be quite difficult between the three parties because of the tensions. There were significant sums of money obviously and it was very difficult to fix after the contract was actually signed.

  33.  That sums it up, frankly. Thank you very much for that. Once that is written down on the record that sums up the whole idea. Can I move on. By November 1997 it seems to me if you read the report that it was pretty clear that Pathway were not going to deliver the scheme because there had been trials in the North East of England, there had been trials in the South West of England and all they had come up with was a Card scheme which dealt with Child Benefit payments, so it was not very, very successful. Why did the new Government that had come in in May 1997 not scrap the scheme straight away? Were they giving the scheme a chance to succeed or what? It was so clear it was going to fail, why did they not just scrap it?
  (Ms Lomax) They had a review because very large issues were at stake, such as the future automation of the Post Office.

  34.  It was a doomed project, was it not?
  (Ms Lomax) I do not think it was that clear to new Ministers and they, therefore, I think rightly, had a proper review to see whether it was capable of succeeding. If you look at July 1998 the Head of the Treasury Task Force, Adrian Montagu, concluded that the project was deliverable although it would take an extra two years.

  35.  The new Government was told that, in fact, it was deliverable?
  (Ms Lomax) Yes.

  36.  By the Department?
  (Ms Lomax) Yes.

  37.  Yet you came into the Department and within a month of coming into the Department the scheme was dropped. Was that a coincidence?
  (Ms Lomax) It was, yes, actually. The discussions were very well advanced by the time I arrived.

  38.  So you are not taking any credit for it?
  (Ms Lomax) I cannot take any credit for it, no.

  39.  You should have done.
  (Ms Lomax) There we are. That was my mere presence.

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