Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 140 - 159)



  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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