Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 120 - 139)



  120.  At the stage, since the statement made by Peter Lilley in 1994, did you anticipate that changes that the minister should have been advising the Secretary of State, that these changes to the law, were hamstringing your contractors, and might, given the period of time over which this was being developed, be presented to Parliament as unnecessary?
  (Mr McCorkell) I believe, and I cannot remember specific examples, I am sure we can let you have a note, we did put through some changes in order to simplify the system[6].

  121.  A bit of too little too late. You said, Permanent Secretary, that you seriously underestimated the scale and the complexity of the task. I think we have one example of that. We know from paragraph 134, which you touched on, the maximum cost to the Department of this failure. We know it already cost the Post Office some hundreds of millions and £180 million to Pathway and several, it could be £170 up to £270 million, to the Department. What is savable from this new system?
  (Ms Lomax) It is not £270 million, I said £127 million maximum. What is savable is the bulk of the CAPS system, which is a major redevelopment of our underlying customer accounting and payment computer systems. It is a very important basis for improving customer service, for improving our accounting and for protecting my position as accounting officer and really putting us on a much better footing for ACT. The CAPS work has been a major step forward for the Department. Also, the other thing that is savable to the Department or, you know, a major improvement is the fact that the Post Office is now automated and we have been able to put in place the bar coding of order books, which enables us to save money there.

  122.  Convince me of one thing has PFI made much difference to this? It seems to me that under any system if you brought a private contractor in to use solely the taxpayers' money and then after some months, or it could possibly be years, you are negotiating with them and handed them a manual and said, "We would like to change that, but we need Parliament's permission and we do not have time". That has nothing to do with PFI, does it?
  (Ms Lomax) The point about PFI is that it puts the onus on the contractor to work out the "how". What you contract for is the "what". What service do you want. The contractor can try different ways of working out how to do it and, you know, it just enables him to figure it out in an immensely complicated system like the benefits system. You know it is not surprising it turned out to be enormously complicated without very close working with the Department.
  (Mr McCorkell) The fundamental thing about PFI is not what PFI should be, it is how PFI was perceived when this contract was let, where it was perceived you have a very high level of requirement and you allow the contractor to go and develop it. We now know, and we have learned the lesson, as others have learned the lessons, that particularly with IT projects, what does not work and cannot work, which is why there is a whole range of guidance now that advises you not to do that, which is why we no longer do it. We still let PFI IT contracts, but we start with the contractor working with us on the business requirement, that leads through to a technical design study, which provides a detailed design for the system and a detailed development plan, at which point you can let that PFI contract.

  123.  There was obviously a project team involved in this. They had, presumably, flowcharts and a myriad of items that had to be ticked and incorporated. One of them was not checking which legislation had to be changed. That is a problem. Why did nobody in this project team sit and say, "Look, if new technology gives us a new way of detecting fraud, countering fraud that we spend a lot of time chasing paper tails on that they should get on with that and in the meantime should be briefing the minister and preparing for legislation to go through Parliament". As far as I can see, no bid was put in to change legislation.
  (Mr McCorkell) Precisely the process you are describing was carried out, but it was carried out after the contract was signed and after we were committed to a fixed price and a fixed timetable for delivery. At present we would be working with the supplier in defining the business requirements and doing the technical design study before we got to a fixed price PFI timetable. The process was carried out, but it was after we were already committed to a fixed price.
  (Ms Lomax) ICL hoped that it would be possible to make more changes when it came to the point than the Department was willing or able to make. When that turned out to be the case you were then forced to develop a more complicated system than you would need to do. It was that sort of circle, that is why a bit more pre contract work would have driven out the complexity that was involved in trying to do this within the constraints of the existing benefit system.

  124.  With all due respect, all that seems to have happened here is a catalogue of previous errors in ordering new technology was transferred to this one, with an added problem of PFI and transfer risk, or not a problem, as the case may be. There was failure to analyse the scale of the task that underestimated them. In 1994 we are well into the computer age, that is a time when many people in their homes have computers and that every Department and every business of just about any size is computerised. We are repeating errors in 1994, 1995 and 1996 by not getting to grips with the specification of what can and cannot be done and the need for Parliament to change legislation. That is at the root of this problem, is it not?
  (Ms Lomax) I do not think it is. I think that this was one of the first ever PFI contracts for a large IT software development, anywhere in the world. I think it involved a different method of working, between the Department and the contractor, from anything that either of them had been used to doing in the past. With IT and software development projects you need collaborative work, particularly in an area as complicated and as sensitive as the benefit system. The way in which PFI was being interpreted at that time got in the way of that necessary collaboration, with the consequences we see.

  125.  I am a former welfare rights officer and I know how complicated it is and I know that the manuals do exist so that people like me can understand it, and claimants as well. I have a final question, were the new ministers in 1997 given a categorical assurance by your Department they could get this back on track?
  (Ms Lomax) Were they given a categorical assurance?

  126.  That could get this project back on track?
  (Ms Lomax) I have drawn attention—

  127.  I really wanted a yes or no answer to that.
  (Ms Lomax) I do not think I can give you that.

  128.  In 1997 when new ministers came in and were briefed on this were they given a categorical assurance by your predecessors that this project, if it was off track could be got back on track?
  (Ms Lomax) Chairman, you would not expect me to answer something which reflects advice given to ministers in a previous government.

Mr Campbell

  129.  Mr Roberts, can I ask you to clear up something which confused me. If we had not gone down the route of Benefit Payments Cards and we wanted to get to the point of automating Post Office Counters, how much would that have cost to get us to where we are today?
  (Mr Roberts) It would probably cost, without the Benefit Card, roughly what it will cost now, which is roughly £1 million[7], because what we have is just that kind of system which we have now implemented and will finish implementing in the next three months.

  130.  Okay. The half billion, or so, which has been quoted earlier is racked up in that £1 billion, is it?
  (Mr Roberts) Yes, it is.

  131.  It is not an additional amount of money on top of that. When we talk about the cost of the failure of the Benefit Payment Card, Ms Lomax, surely we should build into the equation the difference between the anti-fraud measures, which are now possible—one should not underestimate the £68 million saved in bar coding order books—how does that stack up with the savings that the Benefit Payment Card would have introduced?
  (Ms Lomax) We were hoping that the Benefit Payment Card would virtually eliminate instruments of payment fraud, which at the time the business case estimated was something like £150 or £160 million a year. We think we now have the instrument of payment fraud down to something like £100 million through the order book bar coding and we hope to improve that over the next few years.

  132.  While there may have been some benefit in terms of infrastructure investment from the whole project we have not arrived at the destination that we would have hoped to have arrived at?
  (Ms Lomax) We have not eliminated all instrument payment fraud, but we have computer systems within the DSS which are a value in their own right in terms of improving our accounting and our customer service and will provide a very good basis for the move to ACT, which is, of course, a very much cheaper means of payment for the DSS than the Benefit Payment Card would ever have been.

  133.  ACT was not the chosen route announced in October 1995. Was Peter Lilley still the Secretary of State then?
  (Ms Lomax) Yes.

  134.  Given, as you described earlier, the complexity of this project and given the fact there was £1 billion of investment here, and given the fact that this is a political mine field, to change the benefit system, not only does one raise the expectations of taxpayers, in terms of bearing down on fraud, but one also raises the potential questions of recipients of benefits as well. Was it wise, with the benefit of hindsight, to announce just three months short of 1996, that the Benefit Card would be introduced in 1996? Was it a little premature?
  (Ms Lomax) Ministers often announce things which have not happened.

  135.  To announce in October of one year that something would be introduced in 1996, and five years later not only are we waiting for it, but it has not been announced, is that not over-ambitious, over-optimistic? I am searching for the right word here.
  (Ms Lomax) It turned out that timetable was very over-optimistic.

  136.  What effect would that timetable have? Presumably clocks were set ticking here. We have heard a great deal about the nature of early PFIs and the Committee is not unfamiliar with those concerns, it does seem to me, from answers which were given earlier, that the Post Office and the Department had a view about early PFIs, which was about transferring risk to the supplier, about specifying what you want and how you want it and it is up the supplier to deliver on that. Yet, if I heard Mr Oppenheim correctly earlier, he said, "They did not really understand the complexities of what they were being asked to do". That is not just in the nature of PFI, is it, it is in some decisions that were made by people at the time?
  (Ms Lomax) The point we are making about PFI, is that this was government policy at the time, this was the way the government wanted to conduct an investment at the time, and not something that was just sort of invented around this project. The point about the PFI is that it matters more within the context of a fixed price, fixed timetable contract if you have not thrashed these things out before you start. I think that the PFI context is absolutely pitiless if you rush into things, but it also gives people a tremendous incentive to race ahead. ICL was very anxious to move ahead to contract as well. All of the people who were bidding for this contract were spending money without remuneration. The private sector supplier does not get any money until the service is delivered. It was an enormous up-front commitment for them. They too want to move ahead as fast as they can. It was not a question of them asking for more detail and being frustrated by the Department. There was tremendous time pressure both on the Department and on ICL to move this thing along as fast as possible, ICL for commercial reasons and the Department because they wanted the fraud savings, and the Post Office because they wanted automation. Everyone was under a lot of time pressure.

  137.  Presumably at the end of the day somebody has to decide, somebody did decide, to call a halt to this when it became obvious it was not going to deliver what they hoped to deliver. Let me ask you a question about that, paragraph 1.11, the "Initial Go-Live" in October 1996 dealt with, as I understand it, only Child Benefit, it dealt with a limited volume of transactions and it also came up against difficulties about the collection of benefits only by nominated individuals. For anyone who knows much about general benefits, there are all sorts of other issues, it is also quite common for people to collect benefits on behalf of other people. Why did the Initial Go-Live take place and what purpose did it serve?
  (Mr Oppenheim) I think it served as a marker. It was possible to put service into place very quickly, to give an impetus to delivery. Following the thrust of your question, it actually was a distraction from defining the eventual service and it probably put back the eventual service, to some extent. It was treated as an off line special project and ring-fenced so as not to do that to the maximum, but it was an additional delivery that needed attention.

  138.  Was it true that this was a distraction and it really had not served a useful purpose? Was that a decision which was reached quite quickly or a view which was taken quite quickly?
  (Mr Oppenheim) It is a personal view I am expressing here, based on the amount of work of delivering something which did not lead anywhere because it was a special piece of software, it was an intercept of the eventual solution. The interim solution, 1C, which was released in 205 post offices doing, admittedly, just Child Benefit was dealing with foreign encashments and did deal with proxies, and so on. It did have those features. It did have the EVP security system, but it was hard wired as opposed to being flexible. It had all of the headline features, barring one or two support and security features that the DSS considered to be very important for the higher risk benefits, such as income support. That is why the DSS decided not to put income support through the system. Our system did not mind which benefit it was, it made no distinction whether it was Child Benefit or Income Support, because it all came from CAPS. It was part of the decision not to release any other benefits on us, but that is just a technical point.

  139.  We heard earlier, Ms Lomax used the phrase, "A proper review in September 1997", and then the decision by the new government not to go ahead with the Benefit Payment Card. There was an earlier opportunity, was there not, in February 1997, which was the replan. What is the difference between a review and a replan?
  (Mr Oppenheim) The replan was something that we did between the three parties to break up this very large, single block of deliverables into three or four discrete elements of delivery. Progress was, indeed, made down that track and it also reset the timetable by mutual agreement. Progress was made down that track, but roundabout July further major problems were identified which caused a review. Those were essentially around, we would certainly argue, the agreements to agree territory of security and other very difficult areas. At that point we had largely the functionality, as perceived by the customer in place, but we did not have some of what we call the nonfunctional requirements.

6   Note: See Evidence, Appendix 1, page 20 (PAC 2000-2001/158). Back

7   Note by Witness: The figure is, in fact, £1 billion, not £1 million. Back

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