Examination of Witnesses (Questions 60
MONDAY 26 FEBRUARY 2001
60. Do you not think anyone is to blame?
(Mr Roberts) We are all to blame in the sense that
the project obviously did not meet the objectives that were set
for it and, to that extent, in any sense we failed to deliver
what we should deliver. May I just finish pleaseI think
the key issue is you are set a particular framework in which you
try and operate. I think we all now knowthe NAO Report
has made it clearthat that framework was something that
if we were presented with it today, knowing what we know now,
nobody, as you quite rightly say, would have signed up for it,
but at the time five years ago this was something that was completely
different. I think everyone in Government and the trade was trying
to find a new way of getting investment into the projects. It
was the first time I had ever seen a project like this where you
allowed the supplier so much freedom, and that is probably the
same for ICL Pathway, and it did not work.
61. You say you are all to blame, but at
the end of it what I am gathering, since nobody is volunteering
the information, no-one was shown the door as a result of getting
it wrong. That is about right, is it not?
(Ms Lomax) Nobody has been shown the door
62. That is the answer I want. Let us see
what it has cost us. The Post Office is a cherished, national
organisation. The Department operates on taxpayers' money. I understand
it was envisaged in the business case that there would be net
savings of £667 million. That is correct, is it not?
(Ms Lomax) Initially.
63. Initially, that is right. That was then
reduced to £148 million.
(Ms Lomax) Yes.
64. So you were only £519 million wrong
in your estimate. Now, was it the Department that was £519
million wrong or was it the Post Office that was £519 million
(Ms Lomax) That was the consequence of slippage because
we did not get fraud savings, which were the basis for the business
case. The Department did get something of value from this project,
as has the Post Office. We got a major restructuring of our customer
account payment systems, which will be the platform for going
forward to ACT. We also got from Post Office automation the ability
to roll out order book control systems, which are enabling us
to save £68 million in administrative payment fraud at the
65. Let me tell what you what you did not
get. Let us go now to Post Office Counters, you recorded in your
accounts an exceptional charge, I assume that means a write-off
or something of that sort, an exceptional write-off of £571
million. I would expect to see somebody hanging from a lamp post
for £571 million of getting it wrong, but we understand that
no-one has. On the other hand, ICL wrote off project development
costs of £180 million. In terms of risk transfer, I recognise
that is a very significant loss for a private organisation, and
I am not criticising them in that respect, but what emerges is
that in a project that was intended to transfer risk from the
public second to the private sector, the public sector loses £571
million and the private sector loses £180 million. It seems
to me on simple arithmetic that the public sector bore more than
three times the cost that the private sector bore, so the fundamental
objective of passing the risk does not seem to have been achieved
with any distinction whatsoever, does it?
(Mr Lomax) I do not think I agree with that. The question
is what did you get for that money? What happened was that Post
Office automation has gone ahead, but it has been financed by
the Treasury not by the DSS.
(Ms Lomax) That is what the £571 million is.
That is not a dead loss, that is buying something of value. The
people who have really suffered here are ICL.
67. You have written off £571 million,
ICL has written off £180 million, so there is £751 million,
three-quarters of a billion that has been written off. Are there
any other costs that we do not know about?
(Ms Lomax) I do I not agree that the £571 million
represents a loss to the public sector.
68. What happened to the money?
(Ms Lomax) The money is a way of financing Post Office
automation other than through the high charges made by the DSS.
69. Have they still got the money?
(Ms Lomax) The taxpayer has paid for Post Office automation.
70. Somebody has paid. Who has paid?
(Ms Lomax) The taxpayer has paid, but what you have
got is an automated Post Office system.
(Mr Roberts) When Ministers decided to cancel the
Benefit Payment Card they also decided that they wanted counter
automation to continue, as we did. The costs of automating 18,000
counters was round £1 billion. That has now been virtually
completed and will be completed within the next three months.
That cost was borne partially out of the reserves of the Post
Office, which the Treasury allowed us to use to pay ICL for the
development costs, and that had gone on to produce all of the
activities they had so far, minus the Benefit Card. There is a
continuing payment which will go on for about another two years,
which is the remaining expenditure which will complete all of
the activity and, as a result of that, we will then have a complete
network of automated Post Offices.
71. If you had not lost the £571 million
might you have been able to keep open some of the Post Offices
that you closed?
(Mr Roberts) We did not lose it, Mr Williams.
72. Someone did.
(Mr Roberts) It came out of reserves of the Post Office,
which are past profits of the Post Office. It was used to pay
ICL because we changed the contract. Up until that point ICL were
having to fund all of the expenses themselves, that was the nature
of the PFI contract. When the contract was changed it was changed
to what I would call a much more ordinary supplier contract and,
as a result, we then paid for the development costs and we paid
for the installation and the completion of counter automation.
In one sense in Post Office terms, although we would not have
preferred to do it this way, we basically paid £1 billion
to automate the nationwide network of post offices, out of that
we have the assets of the terminals on the counter, the technological
infrastructure, the ability to do the things that we do which
I believe will, to meet your last point, enable us to maintain
that network of post offices at the kind of size that it is at
73. On the basis of what you have just told
me I can well understand why it was that you wanted to keep the
NAO out, I understand very wellwe might have found out
about this a lot earlier. On the basis of what you have just told
me, can I then come back to the Department again, and I finish
on this question. We are now about to launch into another black
hole of public money in the form of the Universal Bank. I say,
a "black hole" because at this stage nobody can tell
us what it might cost. That is correct, is it not? I gather negotiations
are still going on about the public sector input. In view of what
happened in this case, does the Department intend that the National
Audit Office shall have the access, that it thinks it will need,
to the new Universal Bank, or does Treasury? I do not care which
of you answers; I just want an answer from one or other of you.
(Ms Lomax) It is a matter for either the Treasury
or the DTI.
(Mr Hull) Mr Williams, as you know, the Government
is considering its response to the Sharman Report, and the question
you have asked is very much to be taken in that context. I cannot
pre-empt what the Minister will say.
Mr Williams: I said that was the final question,
I have a final observation, as someone who was on the Sharman
Committee, as was the Chairman and David, if anything justifies
the claim this Committee made in the procedures of the Resource
Accounting Bill, and that the NAO has made, for more access to
public funds, this case is a glaring example of where money might
have been saved if there had been involvement at an earlier stage.
Thank you, Chairman.
Chairman: Before I call the next member of the
Committee, may I remind the witnesses that the Report that this
Committee wrote, both on PFI projects and on IT projects, was
drawing on a large amount of experience which the Committee believed
Whitehall should have learned from before this project was even
started. Much of this was outwith or nothing to do with the regulations
that the Committee made. It is simply common sense. I just remind
you of that before we move on. Mr David Rendel.
74. I want to carry on a similar line to
Mr Williams, to start with, at least. Mr Roberts has told us that
the £571 million written off by the Post Office was not wasted
but was used to purchase the automation of the Post Office Services.
You had not expected to have to pay for that; is that right?
(Mr Roberts) We had expected, Mr Rendel, that it would
be dealt with in the way that Ms Lomax has described under the
75. It was an extra cost which was unexpected
as a result of the failure of the Benefits Card System.
(Mr Roberts) Yes.
76. We have heard there was about £519
million worth of fraud which was not prevented, which you had
expected to prevent as a result of the Benefits Card System. Had
it gone ahead you would have prevented £519 million of fraud.
Can you tell us how much money was spend on the Benefits Card
System itself and on those parts of CAPS which are no longer going
to be able to be used?
(Ms Lomax) The total spent on CAPS was £410 million,
of which there was about £127 million, which may or may not
turn out to be nugatory. I will not know how much will, in effect,
until we finish the technical design work for ACT. It is quite
possible that some parts of that system will be reusable, but
I cannot tell you how much at the moment. £127 million is
the top limit on the amount of development cost through CAPS which
may turn out to be nugatory.
77. Can you say how much you spent on the
card system itself which has gone to waste?
(Ms Lomax) That is the only bit. The rest of it is
reusable, it is part of the architecture of our system that we
need to go forward for ACT, we need to improve our customer view
and our internal financial accounting.
78. You have not paid anything to ICL for
the card system itself, which is no longer going to be of any
(Mr McCorkell) During the trials in the 200 offices
we paid for the transaction charges, but it was a very small amount
(Ms Lomax) The loss to the Department is £127
million, the upper limit of that. On the fraud front, we have
put interim measures in place to reduce instrument of payment
fraud, including the order book control system, which the automation
of the Post Office has facilitated. We made savings last year
of £68 million. Some of that £571
we will recoup through other means.
79. The point, I guess, that Mr Williams
was trying to make and I am trying to make in my own way, is it
does seem for a PFI scheme, whose intention was to transfer the
risk to the contractor, the contractor seems to have spent a great
deal less than has both the Department and the Post Office as
compared to what the Department and the Post Office were expected
to spend at the time the contract was signed. That, it seems to
me, to be an absolutely clear failure to transfer the risk. I
understand about the difficulties of PFI and the changes you have
made since that time, but it does seem to me there is a need to
accept that in this case risk was not transferred.
(Ms Lomax) I am not sure I fully accept that. The
write-off that ICL took was just a loss to them. Both the Department
and the Post Office have had value for most of the money they
2 Note by Witness: The estimated spend in the
business case was £410 million until 2004. £270 million
was spent on CAPS. Back
Note by Witness: The sum was, in fact, £127 million,
not £571 million. Back