Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  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 please—I think the key issue is you are set a particular framework in which you try and operate. I think we all now know—the NAO Report has made it clear—that 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 wrong?
  (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 moment.

  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.

  66.  Yes.
  (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 the moment.

  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 well—we 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.

Mr 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 original contract.

  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[2], 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 value.
  (Mr McCorkell) During the trials in the 200 offices we paid for the transaction charges, but it was a very small amount of money.
  (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[3] 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 expended.

2   Note by Witness: The estimated spend in the business case was £410 million until 2004. £270 million was spent on CAPS. Back

3   Note by Witness: The sum was, in fact, £127 million, not £571 million. Back

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