Examination of Witnesses (Questions 140
- 159)
MONDAY 26 FEBRUARY 2001
MS RACHEL
LOMAX, MR
GEORGE MCCORKELL,
MR DEREK
DAVIS, MR
TONY OPPENHEIM
AND MR
JOHN ROBERTS
CBE
140. Was the option to abandon the card
considered in February 1997 as part of the replan?
(Ms Lomax) I do not think so.
(Mr McCorkell) No, I do not believe the option to
abandon the card was considered at that stage. I believe we looked
at our forward plans and realised we could not meet the date we
were then contracted for. We went through a series of discussions
and negotiations between the three parties and worked together
on a new plan, which came up with a new date which we thought
was still perfectly acceptable in terms of delivering the project
and, therefore, the question of cancelling the project did not
arise.
141. My final question, again, goes back
to the issue about early PFIs and the difficulty with that. One
thing which stood out in the report was out of the three bidders
on eight out of 11 of the technical and management criteria, including
security against fraud, Pathway was third, but was the cheapest
bidder.
(Ms Lomax) It was the only one that was likely to
be PFI compliant.
142. I suppose the question I am getting
is, what weight is given to the fact that Pathway was the cheapest,
yet bottom of the league, of three, on eight out of 11 counts?
(Ms Lomax) In terms of cost I do not think there was
a great deal between Pathway and—
143. They were the cheapest?
(Ms Lomax) Just. There were two things which tipped
the balance in Pathway's favour, one was that it was certainly
PFI compliant, which the other two bids either clearly were not
or were dubiously PFI compliant. At that time it made a big difference,
because it was the difference between the project going ahead
and not going ahead, it would not have gone ahead on a non-PFI
basis. The second reason why the Pathway bid was successful was
because people liked the distributed architecture they were proposing,
which was thought to be quite resilient. It was based on a system
which was in operation in Southern Ireland, whereas the other
two proposals did not have that advantage.
144. Given the way which PFI has changed
since then would Pathway get the contract now?
(Ms Lomax) That would be asking me to speculate, I
have no idea.
Chairman: Thank you.
Mr Davidson
145. I wonder if I can start off by asking
a couple of points to Mr Roberts. I have been slightly confused
by the way you have responded to some of the questions, I am not
clear whether or not you believe this whole project has been a
success?
(Mr Roberts) It has been a success in my terms, in
the sense that we have got a product which is working extremely
well, we have managed to automate, which was obviously one of
our aims, the whole network of post offices, we will have done
by the due date, which is June of this year at the latest, we
will probably complete it by March/April rather than June. In
a very limited sense we have an automation project, we have moved,
as many other countries have done, the network of post offices,
which is probably bigger than most other countries, into one which
is now fully automated and on which we can build the kind of technological
future that the performance innovation in the report wanted us
to do. In that limited sense I think there is some success that
we can look at from this project.
146. Some success. You are happy with where
you have got to. You would not have come this way or paid this
money if you had your time again?
(Mr Roberts) That has to be clear. The NAO report
makes that very clear. I would not. We did not get to where we
intended to be when we started. We have not got a Benefit Payment
Card. We are now going to move towards ACT and a Universal Bank,
in the way we have been discussing. We have not got to where we
thought we would be.
147. I am not clear about how much you have
lost. How much money that has been spent on this by the Post Office
has been wasted? You seem to be suggesting that you have spent
lots of money, you got stuff, equipment, and so on, you are happy
to have. Some of that must be investment and some of that must
be waste.
(Mr Roberts) If we go back to the original project,
most of the costs that we were bearing at the time were people
costs, the people on the Project Development Board and the internal
staff, who were working on the system. Most of the heavy costs,
the capital costs, the investment costs, the development costs
was being borne by Pathway who, under the original contract, would
have then got that money back over a number of years on a per
transaction basis as we then used the equipment. That is the big
difference. I reckon by the time the project was changed by ministers
to the different process we have probably spent internally, on
internal software developments, because we had to link this with
other things internally, something around £40 million was
our costs. We then spent, as we discussed earlier, the extra money
to buy the equipment and to have the network automated. 40 million
was sunk on the original project and we have now been involved
in the £1 billion costs.
148. In terms of what could be generally
considered by any normal person as being waste your waste is only
40 million.
(Mr Roberts) Yes, in that sense.
149. I am slightly confused, then, about
the accounts with the exceptional charge of £517 million[8]
here, it is described as requiring an asset which does not at
this stage yield sufficient income to justify the cost. I once
had a car like that. Why, in that case, in your accounts was it
not presented that the £40 million was a disaster and the
rest of it was investment which had been done earlier than was
previously considered?
(Mr Roberts) That was the advice we had
from the accountants under the accounting standards, that the
£571 million that we wrote off in those accounts was the
money what was then going to Pathway for the development project.
My understanding of the impairment rules, FRS11 accounting standards,
is that because at that stage we were not able to say precisely
where the revenue would come from to cover that asset, therefore,
we had to write it down in the accounts in those terms. I gather
that that was precisely in line with the accounting standards.
150. You can understand why normal people
would not understand it.
(Mr Roberts) I am not an accountant, so I agree with
you.
151. I wonder if I can turn to page 72,
paragraph 3.56. This is about your relationship with the Department
at a much later stage in this process, particularly the last sentence,
which is quite an interesting one, "The Department actively
sought, but did not obtain, an open, shared risk management process
from the Post Office Horizon team, who maintained direct reporting
arrangements between themselves and Pathway." That is not
joined-up government, is it? It seems to me that since you are
coconspirators in this there is something not quite right about
all of this. Can you explain why you took this view?
(Mr Roberts) We have been talking this afternoon about
the problems of joint control, after the PA Review in 1997 one
of the things that we certainly at our end wanted not to repeat
was some of the problems that did emerge from joint control that
Rachel Lomax and I have been describing. Our view was that in
terms of actually handling the Pathway contract, because the PA
Review suggested that the Post Office should now do this on its
own, the thing we should have was a very clear link between us
and Pathway, as you would in a normal contract, with us managing
the risks and with us managing the responsibility. Below the level
of the top group there was almost daily contact between ourselves
and the Department talking about what was going on and talking
about risk. The project manager who was running this for us was
then attending the CAPS board to report on a monthly basis what
was going on. It was very clearly trying to separate this out,
having learned, I hope, some of the lessons of the earlier part
of the project, into something which was very clear between us
and Pathway, but with us then keeping the Department involved.
152. Are you saying that I have picked up
the wrong impression from this, or that this is misleadingly representing
the position? I am quite clear what I take out of this, if this
was such a wonderful arrangement, as you have described, which
sounds fine to me, why were they not happy?
(Mr Roberts) I was not aware until I read this they
were not happy. Certainly the intention was, it worked relatively
well compared with what had gone before, that we were sharing
quite openly.
153. I understand that. There is an issue
here, I would have thought that normal procedure would be for
you to see this before it is published and for you to agree it.
Normally the people that are coming in front of us, as I understand
it, have seen what is here and have agreed it, so we do not have
disputations about fact. You are, in fact, saying this is misleading.
(Mr Roberts) I do not know where the comment came
from. From my point of view it worked well and I was not aware
at the time that there was concern.
154. I accept that from your point of view
it worked well. The issue here is that from the Department's point
of view it did not work well, they were not able to access information.
(Mr McCorkell) Perhaps I can help at this stage, Mr
Roberts is absolutely right, the Horizon people reported to the
CAPS Project Board on a monthly basis. In the Department we had
an opportunity to monitor their performance on what they had to
deliver to meet our interface. They came regularly, every month,
and I think Pathway attended most times with them. That reporting
progress worked very well. I think what this is referring to is
the formalisation of the process of sharing risk registrars, which
we did not do well enough with Pathway. What we are saying is
we did not do well enough when we changed these arrangements.
It was not a formalised process for sharing them. It is quite
true to say that at a working level we meet with the Horizon Team
on a very regular basis and then directly, at this stage of the
process, with the ICL Pathway team.
155. I am not sure there is a great deal
to be gained by going further into this. Can I clarify from the
Post Office, you will soon be able to dispense cash for the benefit
recipients, you will be able to participate in the Universal Bank,
we will not be meeting in ten years from now trying to unpick
all of that, will we? All of the lessons of this backlog have
all been learned and there will now be no problems.
(Mr Roberts) I hope they will be learned.
156. I understand that, that is not quite
what I am looking for.
(Mr Roberts) I cannot give you that assurance at the
moment, because an awful lot of work is still going on to develop
the Universal Bank, once we are clear as to what that will mean
then, maybe, I will be in a better position to give you assurances.
Certainly the intention is that anyone what wants to receive cash
in the Post Office will still be able to do that, but the precise
methods are still very much the centre of a lot of work between
us and other government departments.
157. Ms Lomax, how much did your Department
lose out of this—I am not clear how much has been wasted—from
your point of view?
(Ms Lomax) I have given you an upper limit of £127
million, that will turn out to be an upper limit. Until we have
done the technical design work for ACT I cannot tell you how much
of that £127 million will be used.
158. £127 million wasted, how much
do you reckon the savings foregone were?
(Ms Lomax) We are catching up with ourselves. The
total amount of savings foregone as a result of slippage must
be a few hundred million.
159. A few!
(Ms Lomax) I have not done the calculations precisely.
The maximum we estimated we could have saved is a number like
£150 million[9].
Each year we save some money as a result of measures we are putting
in place at the moment. It requires a complicated sum. I acknowledge
we have not made the savings on the scale that we hoped to. If
the Benefit Payment Card had rolled out at the end of 1999—
8 Note by Witness: The figure is, in fact,
£571 million, not £517 million. Back
9
Note by Witness: Sentence should be amended to read as
follows: "At the start, the maximum we estimated we could
have saved from fraud is a number like £190 million (not
£150 million) a year. Back
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