Official hearing page

24 November 2022 – Stephen Byers and Sarah Graham

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(10.00 am)

Mr Beer: Good morning, sir, can you see and hear me?

Sir Wyn Williams: I can indeed, thank you.

Mr Beer: Can I call Stephen Byers, please.

Sir Wyn Williams: Yes.

Stephen Byers

STEPHEN BYERS (affirmed).

Questioned by Mr Beer

Mr Beer: Good morning, Mr Byers.

Stephen Byers: Good morning.

Mr Beer: I’m Jason Beer, I ask questions on behalf of the Inquiry. Can we thank you for the statement that you have provided us and for coming to the Inquiry today to assist us with our investigation. Can you give us your full name, please?

Stephen Byers: Stephen John Byers.

Mr Beer: In front of you there should be a witness statement of 35 pages.

Stephen Byers: Yes.

Mr Beer: On the 32nd page there should be a signature; is that your signature?

Stephen Byers: It is.

Mr Beer: Are the contents of that witness statement true to the best of your knowledge and belief?

Stephen Byers: They are.

Mr Beer: For the transcript, that’s WITN03580100.

Can I start, please, with some questions about your background and experience.

You were part, I think, of the Labour Government that came into power following the general election on 1 May 1997?

Stephen Byers: That’s correct.

Mr Beer: You were initially a minister at the Department for Education and Employment?

Stephen Byers: Yes.

Mr Beer: You held that role for 15 months, I think, until on 27 July 1998 you became Chief Secretary to the Treasury?

Stephen Byers: That’s right.

Mr Beer: You held that post for five months until, on 23 December 1998, when Peter Mandelson resigned, you took up his job as Secretary of State for Trade and Industry?

Stephen Byers: That’s true.

Mr Beer: You held that post for two and a half years until, on 8 June 2001, you took up a post as Secretary of State for Transport, Local Government and the Regions, which you held for just under a year when you too resigned?

Stephen Byers: That’s right.

Mr Beer: I think it follows that the two posts that you occupied, which are of most interest to the Inquiry are, firstly, Chief Secretary to the Treasury, July 1998 until December 1998, and then, secondly, Secretary of State for Trade and Industry, December 1998 until June 2001.

Dealing with the first of those posts first, can you explain in very summary terms, please, which of your responsibilities as Chief Secretary for the Treasury for that five-month period were particularly relevant to the issues which this Inquiry is examining?

Stephen Byers: Well, as Chief Secretary to the Treasury, the main responsibility is public expenditure, that was the main focus of my work as chief secretary. I also, as one of the further responsibilities had a sort of overview of the whole sort of PFI/PPP regime, Private Finance Initiatives, Private Public Partnerships, and that obviously had an implication because the Horizon project was an example of a PFI project that we inherited from the previous administration.

Mr Beer: You, therefore, I think, had oversight of what you describe as the Treasury PFI taskforce led by Adrian Montague?

Stephen Byers: That’s correct.

Mr Beer: You say in paragraph 7 of your witness statement, if we can just turn that up, WITN03580100, at page 3 – thank you:

“The Taskforce had been set up on the recommendation of a review in 1997 by Sir Malcolm Bates and its role was to support government departments with PFI … contracts …”

Then moving on:

“Given the size and scale of the project, and the obviously dysfunctional relationships between the parties involved, Horizon was one of the contracts which the Taskforce came to review.”

Why were there dysfunctional relationships between the parties involved?

Stephen Byers: I think the main difficulty was that the two clients, if I can put it that way, of the contract, which would be the Benefits Agency and Post Office Counters, to be blunt, their interests were not aligned at all. They had two quite different objectives, for the Benefits Agency it was to see benefit claimants moving onto ACT, whereas for Post Office Counters it was a desire to ensure the future of the Post Office network, and those two goals actually were not aligned with each other.

I think the other problem was that both those entities had quite different cultures, if I can put it that way. The Post Office was trying to be more business like, more entrepreneurial, more market driven, and I think the Benefits Agency was very much a part of the Department of Social Security, it was a government agency and it had its own rules and procedures that it had to follow.

So they were two quite different entities trying to achieve two quite different objectives.

Mr Beer: That doesn’t necessarily lead to a dysfunctional relationship, having different objectives –

Stephen Byers: Well, it did in this case, I’m afraid.

Mr Beer: Why did it lead to, in your view, an obviously dysfunctional relationship, having different objectives?

Stephen Byers: I think there may be some – the individuals concerned may have found it difficult to work with each other –

Mr Beer: Which individuals?

Stephen Byers: I can’t remember any particular individuals, no.

Mr Beer: You were, I think, going on to say something else?

Stephen Byers: And also, I think, the relationship with ICL, as the contractor, was not a good one either. Now, whether ICL found it difficult because they were trying to service the needs of two quite different clients, I don’t know, that could be an explanation.

Mr Beer: Was it obvious to you from the very start that these differing objectives, as you put them, or describe them, led to the dysfunctional relationship?

Stephen Byers: I think it made it very difficult and I think, looking back, it was a sort of fundamental flaw in the contract itself, I think.

Mr Beer: You were, secondly, Secretary of State for Trade and Industry from December 1998 until June 2001. Again, in very summary terms, can you please describe for the Inquiry which of your responsibilities were particularly relevant to the issues which we are examining?

Stephen Byers: Well, I think for the purpose of this Inquiry there are probably two main elements of the responsibilities I had at the time. First was –

Mr Beer: Sorry, the witness statement can come down, thank you.

Stephen Byers: First was in relation to the Post Office, the Department of Trade and Industry was the sort of sponsoring department for the Post Office.

Mr Beer: You say in your witness statement, just pausing there, Mr Byers, that you had overall ministerial responsibility for the Post Office –

Stephen Byers: Yes.

Mr Beer: – is that right?

Stephen Byers: But working very much with a Minister of State who has more sort of hands-on responsibility, if I can put it that way. I mean, the relationship between the Secretary of State as a cabinet minister is very often as a sort of overview, whereas a Minister of State will have almost more sort of almost day-to-day responsibilities for a particular very discrete area of policy, and that was the way –

Mr Beer: I’ll explore that in a moment, if we may.

Stephen Byers: Yeah. So the overview of the Post Office, and then also a responsibility sort of for foreign direct investment, inward investment from overseas into – into the UK.

Mr Beer: Thank you.

In relation to the former of those roles, overall responsibility for the Post Office, can you describe in general terms how that responsibility was exercised at this time with the Post Office being a statutory corporation?

Stephen Byers: Particularly in relation to Horizon or more –

Mr Beer: No, generally, please.

Stephen Byers: Generally speaking.

Well, the role was to – the Secretary of State nominated the Chair and the board members –

Mr Beer: When you say “nominated”, you mean appointed?

Stephen Byers: Appointed, yes, yes. We had responsibility for commercialisation of the Post Office, so overall direction of the Post Office. It was a monopoly and we were looking at whether we should change that relationship, whether we should bring in more private sector involvement. So the whole sort of area of sort of demand, meeting new needs was certainly a policy area that I was responsible for as Secretary of State.

Then within that, there is then the more detailed work to do, for example, with the Post Office network and the political pressures that come from that. I mean, I think at the time it was the sort of biggest retail network in the whole of Europe, very important for individual communities, but facing great challenges, so it was how we could respond to that in a positive way.

Mr Beer: Breaking that down a little bit, if we may. Did you have a junior minister with specific responsibility for the Post Office?

Stephen Byers: Yes, there was a Minister of State who had specific responsibility for the Post Office, and it was Ian McCartney, and then when Ian got moved it was Alan Johnson.

Mr Beer: How were responsibilities divided between the Minister of State with responsibility for the Post Office and the Secretary of State, you, with overall responsibility for the Post Office?

Stephen Byers: I probably think – as I said a bit earlier, I think the Minister of State had almost day-to-day responsibility, so would be looking at things in much more detail –

Mr Beer: Just pausing there, and apologies for interrupting you as we go along, when you say day-to-day responsibility, do you mean literally he or she may be – in this case a he – dealing with Post Office issues on a daily basis, or is that a phrase intended to describe more involvement than you had?

Stephen Byers: Certainly more involvement than I had. I think it probably depends on the individual. It wouldn’t surprise me, and I think I saw on the witness list Ian McCartney is going to give his own evidence.

Mr Beer: Yes.

Stephen Byers: It wouldn’t surprise me if Ian was involved almost on a daily basis. What I think I do mean, to be more precise, is that he would have been on top of the detail to a far greater extent than I would have been.

Mr Beer: How do you exercise oversight over him? Do you wait for him to come to you with issues? Do you wait for a ministerial submission, Secretary of State submission, to come up to you, or was there any other mechanism for exercising any oversight?

Stephen Byers: (Pause)

I’m delaying, because I’m thinking back 22 years to sort of identify how things worked in practice. What would very often happen is, if there was an issue, for example – I’ll do it in two bits, if I can.

If there was an element – and this is particularly relevant to the Horizon project. If there was a particular issue that, for example, Alistair Darling, as Secretary of State for Benefits and Social Security was concerned about, I then, as another Secretary of State would deal with Alistair, it was that sort of relationship, and it wouldn’t often be the case that the Minister of State would have a dialogue with a Secretary of State. So that would be my involvement. So it would be something coming in from outside the Department, another Secretary of State.

If there was then internally – if there’s particularly a political issue that I would be concerned about, to do with the Post Office, I would then raise it directly with the Minister of State. If there are issues that the Minister of State was dealing with in a more detailed way, that he felt needed some sort of political clearance or discussion, then that would come up to me from Ian or Alan Johnson.

Mr Beer: You have explained that there was a Post Office board and a chairman of the Post Office?

Stephen Byers: Yes.

Mr Beer: What means of communication was there between the Chairman and you?

Stephen Byers: There was no formal process, so it wasn’t that there was a sort of three monthly meeting or anything of that nature. So there would be communication by – probably in those days, by letter rather than email. I can’t remember any telephone calls with the Chairman, but it would be done in that rather formal way and there would be requests for sort of ad hoc meetings.

Mr Beer: And they could come in either direction, from you or from him?

Stephen Byers: I can’t recall myself requesting a meeting with the Chairman.

Mr Beer: As for the board, you’ve said that, I think, as well as appointing the Chairman you appointed members of the board?

Stephen Byers: Yes, that’s my recollection.

Mr Beer: Did Government have a seat on the board in any way, to your recollection?

Stephen Byers: I don’t think we did but I’m not altogether sure.

Mr Beer: If I was to ask the general question: who was your point of contact on the Post Office board, who would you say?

Stephen Byers: It would be with the Chairman.

Mr Beer: We know that Post Office Counters Limited, POCL, was created as a wholly-owned subsidiary of the Post Office in 1987. What responsibilities or oversight or governance arrangements did you have in relation to Post Office Counters Limited, as Secretary of State?

Stephen Byers: I don’t recall, I’m afraid.

Mr Beer: You don’t recall or you don’t recall any?

Stephen Byers: No, no.

Mr Beer: No. Can you recall what contact, if any, you had with that separate legal entity, Post Office Counters Limited, given, in this case, it was one of the contracting parties to the contract with ICL Pathway?

Stephen Byers: I wouldn’t have had, as Secretary of State, any direct contact with POCL.

Mr Beer: You’ve explained, I think, that there were no scheduled governance meetings between you as Secretary of State and the board or the Chairman of the board; is that right?

Stephen Byers: That’s correct.

Mr Beer: Would you habitually see minutes of board meetings from the Post Office?

Stephen Byers: No.

Mr Beer: Do you know whether anyone amongst the ministerial team, in particular Mr McCartney, did or not?

Stephen Byers: I would have thought that it would be officials, so civil servants would be receiving board minutes and they would probably alert Ian to anything that they felt was particularly relevant, but I wouldn’t see them as Secretary of State.

Mr Beer: Was there, to your knowledge, any government framework document in place that explained the relationships that we’re now talking about?

Stephen Byers: Not to my recollection.

Mr Beer: Thank you.

You tell us in paragraph 42 of your witness statement, if we can turn that up, please, it’s on page 16 – it will come up on the screen for you, Mr Byers – at the top of the page:

“My overall attitude towards the project remained the same [the ‘project’ being the Horizon project] but clearly my responsibility within government had changed …”

You’re talking about here the point at which you moved from being Chief Secretary to Secretary of State –

Stephen Byers: Yes.

Mr Beer: – for Trade and Industry:

“… I now had to have the interests of the Post Office network, and inward investment into the UK, at the centre of my concerns.”

Did that remain the case throughout the duration of your time as Secretary of State up until June 2001?

Stephen Byers: Yes.

Mr Beer: We know that at least one subpostmistress was interviewed by Post Office investigators in March 2001 and went to a Magistrates Court in November 2001, and that other investigations and prosecutions of subpostmasters and mistresses started in 2000 and 2001. You were Secretary of State until 8 June 2001. Were you ever aware that prosecutions of subpostmasters and mistresses were taking place on the basis of evidence generated by the Horizon system?

Stephen Byers: No.

Mr Beer: But were you aware of whether there were any discussions or approval of such decisions at Post Office board level?

Stephen Byers: No, I was unaware of that.

Mr Beer: From your knowledge of the board, are you able to comment as to whether these are matters that would have been discussed at Post Office board level?

Stephen Byers: I wouldn’t know, I’m afraid.

Mr Beer: You wouldn’t know one way or the other?

Stephen Byers: No.

Mr Beer: If the matters had been discussed at board level, is that something that the Department would have been aware of through its sight of the minutes of the board meetings?

Stephen Byers: I would have thought so, yes.

Mr Beer: Can you help us explain the relationship or the balance of power or responsibility here? What would you expect of your officials if, for example, a minute recorded, or a board minute recorded, “We’re now prosecuting people on the basis of the Horizon system”? What would you expect officials to do in relation to that?

Stephen Byers: If it was in the early stages of the Horizon project, when we essentially were still learning how it was operating in practice, then if there were a number of prosecutions and there seemed to be a sort of systematic failure in the programme, then I would have thought that ministers would have been alerted to that.

Mr Beer: Is that the kind of relationship that departmental officials had with the Post Office, ie exercising some sort of watching or oversight function on it?

Stephen Byers: I think the officials will be better placed to answer that than I am, I’m afraid.

Mr Beer: Is that because you would only know if something was escalated up to you through a ministerial submission?

Stephen Byers: Yes.

Mr Beer: And we know that that didn’t happen?

Stephen Byers: Yes.

Mr Beer: Thank you.

Can I turn, with that background, then, please, to look at the Montague report. This is POL00028094. Thank you.

We can see that, on its face, it’s dated July 1998, and we know from other evidence that it was produced or available from 22 July 1998. I think that would be five days before you took up office as the Chief Secretary to the Treasury, on the 27th?

Stephen Byers: That’s correct, yeah.

Mr Beer: So this report is quite fresh as you start your new job.

Stephen Byers: Yeah.

Mr Beer: But I take it it’s the kind of report that, with responsibility for the taskforce, as you’ve explained, you would have read –

Stephen Byers: Yes.

Mr Beer: – in particular, because I think that this PFI project was, I think, being badged up as the largest PFI project of its age?

Stephen Byers: That’s correct.

Mr Beer: Now, if we just take that down for a moment and go back to your witness statement at paragraph 12, please, you say the panel, that’s the three co-authors of the Montague report –

Sorry, it’s page 5, paragraph 12.

Stephen Byers: Yeah.

Mr Beer: You say:

“The panel [that’s the three co-authors of the Montague report] made two recommendations for a possible way forward: [one] a full restructuring of the project; or [two] a partial restructuring. Termination of the project was ruled out, as was continuing the project as planned or simply extending the contract.”

Now, it’s certainly right that the report made two recommendations for a possible way forward, so a full or a partial restructuring of the project, but you say that termination of the project was ruled out.

Are you saying, by that sentence in the witness statement, that the Montague report ruled out termination of the project?

Stephen Byers: My recollection is that was the implication of the Montague report. It may not have been expressly stated, but I think that was the – I think the conclusions that one would draw from the recommendations, whether that was something that he was – a route he was not going down.

Mr Beer: If we can just then look back at the report, please, to see whether it’s expressly stated, or whether it’s by implication, or came from another source, that termination was being ruled out. Can we look at the executive summary, please, on page 3. Just before we get into this, can you help us, as a Secretary of State, to what extent would you have just read executive summaries, or would you have got into the weeds of the detail?

Stephen Byers: I honestly cannot remember on this occasion.

Mr Beer: No, I wouldn’t expect you to.

Stephen Byers: No.

Mr Beer: But as a matter of generality?

Stephen Byers: I would expect my officials to do me a summary of the report. So I wouldn’t have relied on the report itself. My officials would have given me advice based on the report.

Mr Beer: Looking –

Stephen Byers: I’d have received this as Chief Secretary, not Secretary of State.

Mr Beer: Yes, I’m so sorry.

Stephen Byers: Yeah.

Mr Beer: Looking at the executive summary, then, we can ignore the first three bullet points, because they’re background. If we scroll down to “Findings”, then, please.

If you scan through those, I think you will have read these more recently.

Stephen Byers: Yes, I have.

Mr Beer: The document’s been provided. Then go over the page, please to “Possible way forward”, if you just scan through those.


Mr Beer: So the second bullet point is essentially the full restructuring; the third bullet point is the partial restructuring that you spoke about in paragraph 12.


Mr Beer: You can see here, and I don’t think there’s anything in the detail of the report that is different to this, that the authors do not address the issue of terminating the project, less still do they themselves rule out that option.

Do you say, therefore, that because they were talking about a full or partial restructuring of the project, you took it that by implication they had ruled out termination? Or do you think the full – the option of termination and ruling it out came from elsewhere, thinking back?

Stephen Byers: I think … I think any reasonable person would conclude from the “Findings” and the “Possible way forward” that cancellation or termination had effectively been ruled out by the Montague report.

Mr Beer: Because they were only speaking about partial or full restructuring?

Stephen Byers: And they don’t even address the issue of termination or cancellation.

Mr Beer: You take that to mean or took that to mean a ruling out by them?

Stephen Byers: By the Montague report. I hadn’t ruled it out in my own mind, as Chief Secretary.

Mr Beer: Why hadn’t you ruled it out in your own mind?

Stephen Byers: So I came in on 28 July –

Mr Beer: Yes.

Stephen Byers: – and there were certainly a couple of occasions, as things developed, and I could see basically the mess that the Horizon project was in, that we would have to consider the possibility of cancellation, and that was a live consideration during my time.

Mr Beer: Was it always a live consideration when you were both Chief Secretary and Secretary of State?

Stephen Byers: I think – I think when I became Secretary of State – well, two things. I think by the time I left the Treasury in December, having reviewed the option of cancellation, I’d come round to the view that actually that was not going to be possible.

Mr Beer: Was there any direction from Number 10 that termination as an option should be ruled out, that this project was going to go ahead?

Stephen Byers: Not that I can recall.

Mr Beer: Can we look then at the report in some more detail, and go to page 6, please, and look at the “Terms of Reference”. Again, there is some background in paragraph 1. Paragraph 2 tells us that the panel was set up and chaired by the head of the Treasury taskforce, that’s Adrian Montague.

To your knowledge, did Adrian Montague have any technical expertise himself?

Stephen Byers: No, I don’t think he did.

Mr Beer: Then the other two members, if we just go back to the first page of the report, they’re listed – if we scroll down, thank you.

Bill Robins, he was head of the Northern Ireland Social Security Agency; do you remember that?

Stephen Byers: I honestly don’t know.

Mr Beer: Okay. So you wouldn’t be able to help us whether he had any technical expertise or knowledge in IT himself?

Stephen Byers: The panel was appointed before I became Chief Secretary, so …

Mr Beer: Alec Wylie was Director General of Communications and Information Services in the Ministry of Defence. Again, you wouldn’t be able to help us, I suspect, given your previous answers, with whether he had any technical expertise in IT projects?

Stephen Byers: I’m sorry, I just don’t know.

Mr Beer: Okay. Can we go back to page 6, then, please, at paragraph 3, essentially the “Terms of Reference”:

“… we, the Panel, were asked to assess:

“whether the project can deliver a fully functioning system which meets the project specification, and integrates fully with BA and POCL computer systems;

“whether the timetable for completing the systems development, and starting and completing rollout, is deliverable and whether the necessary managerial and organisational structures are in place;

“the likely costs of delivery, under current contract dates and with extension; and

“in each of these areas, the risks associated with these assessments, and whether robust monitoring arrangements and disciplines are in place.”

So that’s the terms of reference, and it’s the first one that I’m particularly interested in, whether the project can deliver a fully functioning system which meets the project specification, and integrates with the existing systems.

Can we go back, please, to page 3, the “Executive Summary” and the “Findings”. The second bullet point, I think, addresses this:

“Our view is that the programme is technically viable. There must be some risk around scalability and robustness because the system has had to be tested at the level of component parts, but we are satisfied these risks are being well managed by Pathway.”

Just looking at that at the moment, do you understand that to be the answer to the question in the terms of reference as to whether the project can deliver a fully functioning system?

Stephen Byers: Yes, I think so.

Mr Beer: What did you understand that to mean, “Our view is that the programme is technically viable”?

Stephen Byers: I think we knew it was a very challenging programme and, in some respects, breaking new ground, and I think we would need to be assured that, actually, it could be delivered in practice.

Mr Beer: Would you agree that, in the way that the issue is approached, it means “feasible”, the project is feasible, ie that the system proposed can, from a technological point of view, be feasibly delivered and built?

Stephen Byers: Yes, I think combined with the point made in bullet 3 about future proofing, yes, that would be my conclusion.

Mr Beer: I’m going to come to bullet 3 –

Stephen Byers: Sorry, apologies.

Mr Beer: – in a moment. That’s all right. The reason for exploring this, I should say in advance, is in a number of places you rely on the phrase “We were told by Montague that the project is technically viable” –

Stephen Byers: Yes.

Mr Beer: – and subsequently that phrase is used within government a lot as meaning – or it might be taken to mean – something rather different, ie the project, the system is, in fact, robust and has integrity, which is why I’m exploring –

Stephen Byers: I’m with you. Yeah, I get it.

Mr Beer: Would you agree that that doesn’t mean that the Montague report – that paragraph does not mean or you didn’t take it to mean that the system was, as it stood, necessarily robust and had integrity?

Stephen Byers: It wasn’t a sort of blank cheque going forward, I’d accept that.

Mr Beer: Can we just look at the body of the report to see if that helps us any further. Page 11, please.

At the foot of the page under “Solution Design and Fitness for Purpose”, paragraph 24:

“We believe the programme can deliver the contracted functionality. The technical architecture is necessarily highly complex: systems must be separated for contractual reasons; they [over the page] have to have high levels of resilience and security; and they employ a number of different computing platforms. These factors have been well considered in the design and structuring of the project and technical architecture.”

Then 25:

“The main architectural issues are scalability and robustness. We are advised that a solution of this scale and scope with so many different platforms and [problems] has, as far as PA [that was a consulting agency] is aware, no precedent. We are satisfied that Pathway’s approach to design, development and performance testing is sufficiently rigorous for such a major undertaking. At this stage of development, testing has to be based on the component parts rather than the entire system. We believe this has been completed in an appropriately structured way; indeed it is a strength of the modular nature of the architecture that this approach [has been] taken. Significant attention is being given to testing at the correspondence server level where the highest risk of congestion occurs.”

Did you understand at this point that there had been no end-to-end testing of the system, it was only of the component parts?

Stephen Byers: I don’t think that level of detail was drawn to my attention.

Mr Beer: I understand.

Then if we look at 26:

“Given the size of the system, there is an unavoidable risk that it cannot have all been tested end to end in earnest. However we are satisfied that Pathway has contingency plans to upgrade individual components of the architecture, should that prove necessary, we. Therefore assess the risk of the entire solution failing to operate as expected to be as low as could be achieved in the circumstances.”

What did you understand that last point to mean in the last sentence there? What guarantee or what conclusion was being drawn?

Stephen Byers: I think the conclusion I would draw is that we would have to – we’d have to test it in real life practical situations.

Mr Beer: The risk being addressed in that sentence, would you agree, is the entire thing failing –

Stephen Byers: Yes.

Mr Beer: – rather than an assessment of whether the system is robust and has integrity?

Stephen Byers: No, I’ll accept that, but also it does refer to Pathway having contingency plans to upgrade those individual components.

Mr Beer: The reason for asking you this is: if we look, please, at your witness statement, and if we look at page 12 of your witness statement, then at the foot of the page a question in italics that the Inquiry asked:

“To what extent were the interdepartmental discussions about the future of the Horizon project influenced, at this stage, by”, a number of things.

Then the third point is:

“… issues concerning the technical integrity and robustness of Horizon.”

Then if we go over the page, please, in 33 you say:

“… the financial consequences of any decision … were a crucial consideration. Cancelling the project would have meant writing off hundreds of millions of pounds of public and private investment in a project which [and then you say this] (as we had been advised by the Montague report) was technically viable.”

The question you were being asked was about issues concerning the technical integrity and robustness of the system and you answer the question about integrity and robustness by reference to the Montague report’s conclusion on technical viability; do you see what I mean?

Stephen Byers: Yes, yes.

Mr Beer: In your mind, were they the same things or different, or didn’t you address them?

Stephen Byers: I certainly didn’t address them at the time I was Chief Secretary.

Mr Beer: Thank you. Then a little further down at 35, when you’re addressing that third point, (iii) of the Inquiry’s question, you say:

“As for the technical integrity and robustness of Horizon, the Montague report in July 1998 had assured us that the project was technically viable and showed good evidence of future-proofing.”

That future-proofing is the third bullet point we’re going come back to in a moment.

Stephen Byers: Yes.

Mr Beer: Again, that tends to suggest, and you’ve written this in a way that was referring to your state of knowledge back in 1998, that you equated the technical integrity and robustness of the system with what Montague had said about its technical viability; do you see?

Stephen Byers: Yes, I understand that point.

Mr Beer: In your mind, were they one and the same thing?

Stephen Byers: Yes, I think I probably did take that view.

Mr Beer: Sir Adrian Montague, as he now is, has made a witness statement to the Inquiry saying, about his review, that:

“It was not possible to test Horizon for real. The review focused on whether, at a high level, the project could be delivered successfully rather than whether it was operating or indeed could operate in accordance with its contractual specification. Of course, this meant that none of the shortcomings in the Horizon system in operation that came to dog the project in later years was or could have been evident at this stage.”

Thinking back, did you understand that, that what the Montague report was about was not against a background of having tested the Horizon system in operation; it was all about whether the project could, in theory, be technically deliverable successfully?

Stephen Byers: Yes, and I think that’s why we insisted as ministers that there had to be live trials of Horizon. It had to be tested in a real working environment, and that’s not – Adrian couldn’t address that at the time of his report.

Mr Beer: Can we go back to the Montague report, please – thank you – and then if we can look at page 3, and go back to the bullet point that we were about to turn to under “Findings”, third bullet point. So we’re looking at the paragraph underneath the one we were previously looking at:

“There is good evidence of future proofing at all levels. The basic infrastructure is very robust for the future and, in the main, industry standard products have been used. The system should allow POCL to compete for new business in a variety of markets … New applications based on smartcard technology should be relatively straightforward and economic. If online applications are required, they may take longer and require more investment.”

Did you or do you take anything from that conclusion as to the existing robustness of the system or whether this is instead looking at the future?

Stephen Byers: I think – I think here his finding is looking to the future.

Mr Beer: To what extent can you now recall whether there was reliance within government on what had been said by Montague, generally, as to the technical viability of the product or the system as meaning that it was a robust system?

Stephen Byers: I think we did take that from the Montague report. It would be helpful – and I have to admit that I haven’t seen it – to see the work that PA Consulting did because they would have been the entity that would have addressed the technical issues around how robust Horizon actually was at this stage.

Mr Beer: Can you recall what had led to – I’ll put that in another way.

Can you recall how Montague went about his work, ie what level of deep dive into the operation of the system he undertook?

Stephen Byers: I think Sir Adrian’s going to be in a better position to address that.

Mr Beer: Would you agree that it is logical that the report could not offer a view on the existing integrity or robustness of the system because it had not been built yet?

Stephen Byers: That would be a sensible conclusion.

Mr Beer: You tell us in your witness statement, if we can go back to that, please, at paragraph 19, it’s on page 7, that, I think, despite their differences:

“All of the government departments were agreed that it was essential that Horizon undergo a live testing programme (rather than acceptance on the basis of ‘laboratory testing’, as ICL with were pushing for).”

That’s something that you’ve mentioned this morning:

“The DSS in particular had had a bad experience with an IT project which had been accepted in a test environment which had failed when actually rolled out.”

You say that was a priority concern for them. Can you recall who the supplier was there, whether it was, in fact, ICL?

Stephen Byers: I can’t recall, I’m afraid.

Mr Beer: Can you recall, or do you remember, the DSS being in litigation with ICL at this time?

Stephen Byers: I can’t recall that.

Mr Beer: One thing we don’t see in the Montague report is a reference back to any of the issues that had been raised or concerns raised about the Pathway proposals in the course of the procurement exercise. To what extent, as a member of the new Government, did you have sight of issues and concerns raised about the technical viability of the Pathway proposal?

Stephen Byers: I think it’s one of the great frustrations we had as ministers in the new administration. We were not – we were not provided with any detailed information about the difficulties that may have been experienced with Pathway during the tendering process. That was all denied to us, and there is a well established protocol that members of a new government administration cannot see the documents or the policy papers that were provided to the previous administration.

So we were – we were blindsided, and I can understand why, for political reasons, one is not allowed to sort of delve into why particular political decisions were taken, but I cannot see why, if technical weaknesses and problems had been identified under a previous administration, why we couldn’t have been alerted to those. And we were not.

Mr Beer: That’s a convention of our administration of politics.

Stephen Byers: Yeah. Well, of government, not just of –

Mr Beer: Of government.

Stephen Byers: Yes.

Mr Beer: What is your understanding of the limit of it, or the limits of it? What are you denied access to?

Stephen Byers: Well, on this occasion, everything. You know, we had, we had four key questions as ministers that we wanted answered about this functional, fatally-flawed contract that was Horizon. We wanted to know who decided it should be a Benefit Payment Card, and not a smartcard; why did they arrive at the decision it should be a PFI contract, when, in fact, this was a fantastically complicated contract; was PFI the right approach – we didn’t have the details of the tendering process, but I think the Inquiry may have sort of delved into that; and, finally, why did they end up with, basically, two clients in the Benefits Agency and POCL whose interests were not aligned?

Now, we were denied any of that information, as the new administration. As I said earlier, I can understand why we can’t delve into the political decisions, the party political decisions, if you like. I can understand why we were not shown the sort of details the Inquiry’s now had about our decision-making process during this period. But I would have thought that if flaws in the system had been identified at an early stage, there’s no reason why that couldn’t be disclosed to an incoming administration. It would have helped us enormously if, as ministers, we’d been told that these problems had been identified.

Mr Beer: So just testing that at a more general level, are you denied all previous papers of the past administration?

Stephen Byers: Yes.

Mr Beer: What does “all previous papers” mean?

Stephen Byers: From my recollection, when we would enquire from our civil servants, who would have been part of that process, what happened, what was the reasoning behind it, there was a – there was a veil that we couldn’t lift.

Mr Beer: To use this as an case study, one could understand why you wouldn’t be able to see submissions to ministers, agreed?

Stephen Byers: Yes. No, I understand – yes, I understand that.

Mr Beer: One could understand why you couldn’t see inter-ministerial or inter-Secretary of State correspondence?

Stephen Byers: Yes, I mean, to be honest, much of the information that’s before the Inquiry around our decision making process as ministers –

Mr Beer: Yes.

Stephen Byers: – I wouldn’t have expected to see that.

Mr Beer: No. If you were the next administration after yours, no.

But if technical reports had been prepared, is there anything, to your understanding, in the convention that would have prevented them from being seen by Adrian Montague?

Stephen Byers: It would be interesting to know if Adrian had that information. I don’t know the answer to that.

Mr Beer: The question was slightly different: is there anything to your knowledge in the convention that would prevent or would have prevented him from seeing that previous technical assessment of the Horizon proposal by ICL Pathway?

Stephen Byers: It’s such a long time ago, I honestly can’t recall the detail of the convention now.

Sir Wyn Williams: Mr Byers, who would be the arbiter of the convention? Assuming – forget Horizon. Assuming that you as an incoming Chief Secretary were really anxious to see a particular document, which you knew must have existed, for example, who would actually say “You are denied”, so to speak?

Stephen Byers: Well, it would probably – I’m trying to recall, Chair, if it happened in my time. It would be, first of all, a request to your own private office, so your principal private secretary, and if he or she said “I’m really sorry, we can’t disclose that information” and if I felt very strongly about it, I would then go to the Permanent Secretary, the head of the Department, and they would rule one way or the other.

Sir Wyn Williams: Right, thank you very much.

Mr Beer: Can you recall that issue arising in relation to Horizon about technical issues, or was it limited for more political issues that you had mentioned a moment ago?

Stephen Byers: I can’t remember any specific request around the technical questions.

Mr Beer: Because the Inquiry, you may know, has received a vast body of evidence concerning issues and concerns raised over the ICL Pathway proposals in the course of the tendering process, each stage of the procurement exercise, and that knowledge gained doesn’t appear to have featured in any of your decision-making or indeed in Adrian Montague’s report?

Stephen Byers: Or was drawn to our attention. I mean, there’s no documents that refer to those discoveries.

Mr Beer: No.

Can we move on, then, please, and go back to the Montague report and look at page 4, please. That’s POL00028094. We can see from the last bullet point one of the recommendations was the appointment of a “neutral troubleshooter”:

“… directly responsible to Ministers and with their full confidence … to ensure all the parties give their full commitment to implementation of the programme and that rollout is completed at the earliest agreed date.”

Was that recommendation, the appointment of a neutral troubleshooter, accepted by you?

Stephen Byers: Yes, it was.

Mr Beer: I just want to see what happened after the report was delivered. Can we look at HMT00000055. If we just see, this is a letter dated 10 September 1998.

If we go to the last page, please, page 3, and scroll down, we can see that, from page 1, it was addressed to Alistair Darling – he was then the Secretary of State for the DSS – and copied to the Prime Minister; Jack Cunningham, I think he was then the Minister for the Cabinet Office and Chancellor of the Duchy of Lancaster.

Stephen Byers: That’s right, yeah.

Mr Beer: Peter Mandelson, who was then the Secretary of State for Trade and Industry. That was the job that you were soon to be taking up but didn’t know it yet.

Stephen Byers: Yeah.

Mr Beer: Ian McCartney, I think his formal title was Minister of State for Competitiveness, does that ring a bell?

Stephen Byers: It does, but within that overall brief he had specific responsibility for the Post Office.

Mr Beer: And Sir Richard Wilson, who I think was the Cabinet Secretary and the Head of the Civil Service?

Stephen Byers: He was at that time.

Mr Beer: Okay, if we go back to page 1, please. It’s clear from paragraph 1 that you’ve met with three others the previous day, you say “three streams of work”, and you say, first, in paragraph 3, there must be a negotiation between the parties to the contract. You would propose to write to ICL in the terms at annex A to set the framework.

Can we just look at that, please, and that’s pages 4 and 5 of the document. So this is a draft letter from you to ICL Pathway. We will see in due course that it was sent in these terms:

“As you know, Ministers have been reviewing the future of this project in view of the serious delays to the implementation timetable, and ICL Pathway’s failure to deliver a key contractual milestone for which ICL Pathway has been placed in breach of contract.

“We remain seriously concerned by the slow rate of progress on this project which was originally scheduled to be fully operational by October 1998.”

Of course, that’s the date at which you’re writing this or a month before.

Stephen Byers: Yes.

Mr Beer: “However, we have decided to allow a period of one month for discussion between the parties to see whether satisfactory commercial terms can be agreed for continuing the project, outstanding differences on the timetable can be resolved, and a credible programme for full implementation can be agreed.

“To facilitate this process, I am proposing to appoint an adviser to work with the parties towards finding a solution. He will report [directly] to me, and I expect him to be given full co-operation by all the parties. His terms of reference are attached.

“To provide a satisfactory outcome, the conclusion of the discussions must meet a number of basic criteria which include:

“any adjustment to the contracts must of course be compatible with procurement law;

“[two] the contract must provide a firm date after which the Benefits Agency will have no further commitment to using the Benefit Payment Card.”

A general point is made to avoid misunderstanding:

“ICL Pathway entered into these contracts on PFI terms which entail accepting significant risks. It should be clear at the outset, therefore, that the discussions are not posited on an outcome which would ensure ICL Pathway a positive return on the project.”

Can you just decode what you mean there? I think he know what you mean, but …

Stephen Byers: It was a general principle under PFI that risk transferred to the private sector and, therefore, if there was a loss to be made by ICL that was a risk that they’d taken by agreeing to the PFI contract.

Mr Beer: So this was a condition to entering into the process that you were proposing?

Stephen Byers: Yes, and I think there may have been an indication – this is a presumption, I’m sorry, but I think there may have been an indication from ICL Pathway before, that if they were not going to get a positive return, then they would – they would have difficulty proceeding.

Mr Beer: You outlined some other conditions, “agreement that”:

“no party will issue legal proceedings against any other while the discussions are being conducted;

“discussions will be conducted in strictest confidence and without prejudice; and

“work on the project will continue in accordance with the existing contracts while discussions are continuing.”

You ask them whether they’re prepared to accept.

Can we go back to page 2 of the letter, please, and paragraph 4. You say:

“… we will need [this is to your colleagues in Government] to appoint a troubleshooter to facilitate the process.”

You annex at B proposed terms of reference, you’re considering who might be a suitable appointment for this important position.

Was Graham Corbett, in due course, appointed as that neutral troubleshooter to that important position?

Stephen Byers: Yes, he was.

Mr Beer: And was he chosen by you?

Stephen Byers: On the recommendation of, I think, Steve Robson, who was second Permanent Secretary in the Treasury.

Mr Beer: In your statement you say – the cross reference is paragraph 22 to your statement – that it was on the recommendation of Adrian Montague?

Stephen Byers: Ah, you could be right. I – that must be the case –

Mr Beer: It’s more important for you to be right.

Stephen Byers: Yes, of course, of course, I apologise.

Mr Beer: No, that’s all right. Do you want to just look at what you said in your statement?

Stephen Byers: Please do –

Mr Beer: So it’s paragraph 22 of your statement.

Stephen Byers: Because thinking about it now I’m sure that Steve Robson had some role, but I could be wrong, and I’m sure that in preparing my witness statement I’d have double-checked on –

Mr Beer: You’re quite right, you do say “and another HMT official, Steve Robson”, so it’s both?

Stephen Byers: That would be it.

Mr Beer: Why was he chosen?

Stephen Byers: He had – his expertise was, he was very much a sort of a finance man, and –

Mr Beer: The statement can come down, thank you.

Stephen Byers: Yeah. And he also – he was a pretty robust character, and I think we’d got to the stage where we probably needed heads knocked together, and I think the view was that he would be – he would be a good person to do that.

Mr Beer: Yes, that can come down as well, thank you. There is some reference to that in the papers, that heads needed to be knocked together. Was it the robustness of his personality that led you to believe –

Stephen Byers: He had – I think he had a reputation for, in a very appropriate way, of being – not in a bullying or intimidating way – but a way of being sort of assertive and pointing out to people that they had responsibilities and they should be doing, doing the right thing.

And I think that applied – and I think this is covered in that note, because I’m saying to people like Peter Mandelson and Alistair Darling that they had responsibilities to make sure that their respective teams were entering into this process in a positive way.

Mr Beer: So it wasn’t just ICL Pathway that needed to have its head knocked?

Stephen Byers: No, there were quite a few heads that needed to be knocked.

Mr Beer: Can we go back to HMT00000055, please, and turn to page 6, please, which are the terms of reference for the troubleshooter. Skipping the first paragraph:

“The adviser will report to Ministers via the Chief Secretary to the Treasury [you].”

Was that deliberate, that it was to your level rather than to the ministers under you such as Mr McCartney?

Stephen Byers: Well, at this stage I was chief secretary to the Treasury, so –

Mr Beer: I’m so sorry.

Stephen Byers: – so I was under Gordon Brown, would be the way it would work, but Gordon wasn’t involved in this, he was later. I was in the middle of, I think I describe in my witness statement, a bit like a spider’s web, so I was trying to get government departments, Trade and Industry, Social Security – so Peter Mandelson and Alistair Darling – to work together and to agree to this process. So I was the – I was trying to be the sort of matchmaker in this whole thing. And that’s a role actually the chief secretary often plays, because having responsibility for public spending, you cabinet colleagues are always very keen to be sort of quite friendly with you, because you decide if they’re going to get money or not.

So you have a sort of role to play, and when there’s a particular problem, which we had here, involving several government departments then, and I think this is still the case today, the chief secretary is often the person who actually brokers deals between departments.

Mr Beer: That’s why you’re the web and each of those men are spiders?

Stephen Byers: Yes, I was reflecting yesterday evening on whether that was quite a very – not a very appropriate description, but hopefully the Inquiry gets my meaning.

Mr Beer: Yes, I think – well, at least I do.

You will see the objectives set out:

“The immediate objective will be to report to Ministers within one month on:

“whether there is a commercial basis for proceeding with the project which is acceptable to the parties;

“whether there is in place a satisfactory implementation plan with a detailed timetable for completing the project;

“any further action which would need to be taken to ensure successful delivery of the project.”

Then scrolling down:

“The role of the adviser will be to:

“convene and chair discussions between the parties;

“commission papers and proposals from the parties …”

Then, over the page:

“independently appraise the parties’ claims and contributions;

“produce compromise proposals …

“take such other action as he [sees] fit to establish an acceptable basis for continuation;

“ensure the parties provide information necessary for the analysis of alternative options.

“The adviser will have no power to bind the parties …”

Then lastly this:

“If the project continues there is likely to be a continuing role for the adviser in facilitating [process].”

So that last paragraph made it clear that there ought to be a continuing role for the troubleshooter; is that right?

Stephen Byers: Yes.

Mr Beer: Now, I think you secured some broad consensus for these proposals?

Stephen Byers: Yes.

Mr Beer: If we look at what was said, HMT00000052.


Mr Beer: I’m just counting my 0s. Yes, thank you.

This is a letter from Alistair Darling at the DSS to you, 14 September, thanking you for your letter of the 10th.

Scroll down, please. He is grateful to you for the more detailed account you’ve now provided of the proposed way forwards:

“… it is important for there to be a rigorous process, at the end of which it would be clear that the route forward produced better value for money for Government. And on this basis I agree with what is proposed. I particularly support what you say about the need to provide sufficient analysis of the three main options to allow us to judge, at the conclusion of the discussions with … Pathway, whether the outcome of the negotiations offers [us] best value for money for the public sector as a whole.

“There is one specific point [that he would like to see included in the letter to ICL] … that this Department’s ability to migrate to an ACT-based system, in preparation for the end of card usage by contract end date, should be [apparent] to ICL. We are working on a strategy …”

Then continue, please:

“More generally, there are some important points we need to establish before we take forward discussions with ICL:

“the Government’s view of the strength of its negotiating position with ICL …”

If you just read that to yourself, what he said.


Stephen Byers: Okay.

Mr Beer: Second bullet point:

“… discussion of any option to continue, is clearly presented at all times against a backdrop of Government’s right to terminate …”

That’s self-explanatory:

“[and] agreement on the legal and financial parameters of the negotiations; in particular that the contract cannot safely be carried on beyond 2007 and that prices cannot be significantly increased.”

Then the last paragraph on that page:

“[He welcomes] your assurance at the meeting that [Treasury] would be prepared to provide the additional requirement if it fell to my budget.”

I think that’s an example of the kind of thing you were just mentioning?

Stephen Byers: Mm.

Mr Beer: So decoding what Alistair Darling is saying there, would you agree this is a cautious but conditional “yes”?

Stephen Byers: It’s a very Alistair Darling letter, which is –

Mr Beer: We don’t know what that means.

Stephen Byers: Just as you’ve expressed it, it’s cautious but a lukewarm “yes”. And he’s laying – he is doing what a good Secretary of State does, he’s laying down clear sort of conditions and parameters for the discussion, and some red lines as well, I think, as to – and he’s looking after the interests of his Department.

Mr Beer: One of the things I’m going to come back to, when we look at all this correspondence as a whole run, is whether that’s what people were doing, looking after the interests of their department, and sight was lost of the subpostmasters in the process. You understand?

Stephen Byers: I do.

Mr Beer: Can we look at the reply from Peter Mandelson, then Secretary of State for Trade and Industry, at HMT00000048.

I think we’re going to find, but I’d like you to confirm, that this reply is a more fulsome “yes”:

“Thank you for your letter of 10 September …”

Scrolling down:

“I confirm that I am content with what you have proposed. In particular I accept the remit set out in paragraph 5 of your letter. My objective within the initial timescale of one month will be as a minimum to agree with the Post Office Board the actions that need to be taken on each of the items listed; to ensure that practical measures are put in place as quickly as possible to take these actions forward; to institute arrangements to monitor progress on a regular basis; and to be in a position to report back to colleagues such substantive progress as may have been proved possible on each by the end of the first month.

“[He is] pleased to see that you envisage a role for the troubleshooter which extends beyond the initial negotiation and that this is reflected in the draft terms of reference …”

That was that last paragraph of the annex that we read?

Stephen Byers: Yeah.

Mr Beer: “This will be important in minimising the misunderstandings and disagreements between the parties which have undoubtedly contributed to delays in the past.”

Then over the page, finally he agrees with the suggestion – I didn’t in fact read this in your proposal – of an interdepartmental working group including the policy unit.

Again, could you decode or translate how you read his letter as a whole –

Stephen Byers: Yes.

Mr Beer: – because I characterised it as a more fulsome “yes”?

Stephen Byers: I think it’s a positive agreement to the work of a troubleshooter, yeah.

Mr Beer: Then the third party in this, ICL Pathway, replying to that letter that you saw in draft?

Stephen Byers: Yeah.

Mr Beer: I’m not going to go to the version in fact sent. That’s BEIS0000283.


Mr Beer: Thank you. A letter to you from – if you just scroll down on the right-hand side, please, scroll down – from Keith Todd, can you see that, chief executive?

Stephen Byers: Yes, yes.

Mr Beer: Just going back up, please, he thanks you for your letter of 15 September:

“We reject the allegation that ICL Pathway is in breach of contract … you will be aware that we have already taken serious exception to the attempts by the DSS to establish this position in their correspondence to us.

“… we continue to believe that this programme offers major long-term benefits to both the Benefits Agency and the Post Office as well as wider Government aspects … therefore, keen to see this project continue, and are prepared, without prejudice to our legal rights, to agree to the one month period of discussion for the purpose and on the terms which you suggest.”

He is satisfied with the terms of reference for the independent adviser and will give him “our full co-operation”:

“Regarding the conditions for opening discussion mentioned in paragraph 6 … we confirm that we will accept them for the relevant period of one month.”

Then scrolling down:

“We would make the point that paragraphs 4 and 5 of your letter cause … some concern … any adjustments to the contract must be compatible with procurement law, we have already sent to the parties and the Treasury our legal opinion that a commercial settlement of our differences will cause no difficulty …

“So far as the other matters … are concerned, in our view it is not helpful to the process of full and frank discussion and negotiation to set any preconditions as to the components of a commercial settlement … these are matters that have to be discussed as part of the negotiations in order to reach a settlement.”

So those conditions, you remember there were four of them that you were setting out, he’s saying “No, they need to be part of the discussion” rather than preconditions for entering into a discussion?

Stephen Byers: Yeah.

Mr Beer: Then continuing, he asks for details of the independent adviser.

So characterising that as a whole, would you say relatively frosty but willing to engage in the process?

Stephen Byers: Yes, and I think trying to protect their position as a company.

Mr Beer: Sir, although we’re part-way through this run of correspondence, 11.15 now, that might be an appropriate moment to take a break until 11.30.

Sir Wyn Williams: Yes, Mr Beer.

But while it’s fresh in my mind I would just like to ask Mr Byers one or two other questions about this convention, which is the first time that I’ve heard it in this Inquiry, at least, Mr Byers.

Can I ask some basic questions: is this a convention, ie that you don’t get information about what the previous Government has been up to, which operates only if there’s a change of government which includes a change of government of political persuasion?

Stephen Byers: I’d always assumed so, and given what has happened over recent months, it would be a bit chaotic if the fourth Chancellor in nine months can’t be told what –

Sir Wyn Williams: Right, fine. That’s what I would have expected, but I just wanted to be clear about that.

But there must be a number of instances, Horizon being one of them, where a project begins under one government but is obviously intended or at least might continue under another?

Stephen Byers: Yes.

Sir Wyn Williams: On the face of it, trying to be objective, I would have thought that knowing what went on about technical aspects relating to a project like Horizon before you become the Government might assist in helping you to make decisions after you’ve become the Government?

Stephen Byers: The officials in the Department will have had that information.

Sir Wyn Williams: Sure.

Stephen Byers: So they will be aware of it.

Sir Wyn Williams: Yes.

Stephen Byers: They clearly feel constrained to let the new administration know. Now, I can understand – as I was saying to Mr Beer, I can understand if it’s a sort of party political issue why we wouldn’t be told. I think everybody would go along with that. I think if there are technical problems which have been identified within a project like Horizon, then I don’t see why we couldn’t be told or alerted to the fact there may be weaknesses, because then we would have constructed something in a way which would have addressed them.

Sir Wyn Williams: Right. But, as a matter of fact, in this instance, you weren’t told, I think is your evidence, yes?

Stephen Byers: That’s correct, yeah.

Sir Wyn Williams: Yes.

Now, in this particular instance, there’s a variation that I wanted you to consider, and that is that one of the parties to the contract which was concluded in 1996 was the statutory corporation, namely the Post Office.

Stephen Byers: Post Office.

Sir Wyn Williams: So what would be preventing – and I’m not saying this in any critical sense, I’m just trying to understand it – what would prevent an incoming relevant minister from simply asking the Post Office what went on?

Stephen Byers: That’s a very good question. I’m afraid I don’t have the answer, Chair.

Sir Wyn Williams: All right. Because, as you’ll understand, I have to try and make sense of governance issues.

Stephen Byers: Good luck with that one! Yes.

Sir Wyn Williams: Because, on the face of it, the best people to provide information about, say, the procurement or evaluation process are the evaluers, and they were the Post Office and other civil servants, yes?

Stephen Byers: Yes, and they would be the same people. I mean, they didn’t change, and I think you’ll hear evidence from, you know, the relevant civil servant who was in charge of the Post Office for a number of years, under successive administrations.

But, in this case, I can’t see anywhere, and I can’t remember, and I haven’t seen anything in the documents that have been provided to the Inquiry, to show that, as ministers or certainly myself as Secretary of State, was alerted to the problems that were identified in the tendering process which has been referred to by counsel to the Tribunal.

Sir Wyn Williams: All right, thank you. It becomes more and more intriguing, this aspect. Thanks very much.

Let’s have our break. Shall we now break until 11.35, or what?

Mr Beer: Yes, thank you very much, sir.

Sir Wyn Williams: Right, thanks.

(11.20 am)

(A short break)

(11.35 am)

Mr Beer: Good morning, again, sir. Can you hear and see us?

Sir Wyn Williams: Yes, I can, thank you.

Mr Beer: Sir, just to explain to you, we are in possession, in the Inquiry of the Ministerial Code, the Cabinet Manual from the time that we’re talking about, and the directory of Civil Service guidance, which sits underneath the Cabinet Manual, each of which contain, to a greater or lesser extent, guidance on the parameters of the convention that we have been discussing.

But given Mr Byers’ answers earlier about given the length of time that has elapsed since he held relevant office, I haven’t thought it appropriate to use Mr Byers as a witness to explore any further the convention and, instead, we’re going to leave his answers where they stand.

Sir Wyn Williams: Well, I’m perfectly happy with that, Mr Beer, because, as usual, you appear to be ahead of me. But I was just interested in what Mr Byers was saying.

Mr Beer: Thank you very much, sir.

Can we look, please, at POL00028098, and go to page 3, please. We have been looking, before the break, Mr Byers, at the outfall from the Montague report, one of which recommendations was the appointment of the neutral troubleshooter, the appointment of Graham Corbett and his terms of reference, and this is the product of the appointment of Graham Corbett in the role that we have seen.

It’s a letter to you dated 18 October 1998. In the first paragraph he records that he was appointed by you on 17 September and was required to report by 16 October 1998, so within a month.

Can we go to page 4, please, over the page. I think you’ve seen this document as part of your preparations –

Stephen Byers: Yes.

Mr Beer: – for giving evidence today. In the interests of time, I’m not going to go through it paragraph by paragraph, but if we just look at the heading there:

“The discussions which I held with the parties, and the information developed for those discussions, were all without prejudice and confidential …”

That was one of the conditions, I think, that was set. Then under the heading, “The Path of the Discussions – Commercial”. He sets out, over the rest of that page – if we just scan through it and scroll down, and then on to the next page – essentially a chronological account of the attempts that he had made to negotiate between the three parties: BA on the one hand, Post Office on the other and ICL on the third.

Then over the page again, please, and he concludes:

“There was no further change in the position between the parties when the without prejudice discussion month came to an end at midday on 16 October.”

Then he turns to “The Path of Discussions – Programme and Project Management Issues”, narrating that a working group was established of the programme directors from each of the parties under the chairmanship of the director of the Horizon Programme Office and with PA Consulting keeping close to and guiding their discussions. He annexes PA Consulting’s report.

Then if we scroll on, please, there is a narration of the parties’ views in the first two main paragraphs on that page.

So, so far, we’ve had discussion about seeking to resolve at a commercial and essentially contractual level the dispute between the parties. It’s right, I think, that there’s nothing to do with issues of technical reassurance or the integrity or reliability of the system that might be produced as part of this exercise; is that right?

Stephen Byers: That’s correct, yes.

Mr Beer: Would that be consistent with Mr Corbett’s appointment, that he was brought to knock commercial heads together, rather than knock technical heads together?

Stephen Byers: That’s an accurate reflection of the role we expected Corbett to take, yeah.

Mr Beer: Then scroll down, please, to “The Way Forward”. If you just read that first paragraph to yourself, please.


Mr Beer: Then over the page, please. He’s:

“… profoundly disappointed that we have been able to reach our primary objective and will continue to hope that some way of bringing this project to fruition may yet be found … In the meantime, progress made or programme issues will be of real and enduring benefit if the project continues …”

Then he pays tribute to the hard work that others involved in the project have given?

Stephen Byers: Mr Beer, could we possibly go back to the end of the preceding page?

Mr Beer: Yes, of course. That’s it. To the “running sores list”?

Stephen Byers: No, it’s the bottom bit:

“I would also urge that as soon as BA can be satisfied that it has a …”

Because I think that’s quite – that’s referring to the ability –

Mr Beer: “I would urge that as soon as BA can be satisfied that it has a …”

Then over the page.

Stephen Byers: Yeah.

Mr Beer: “… system which works both on test and in practice, consideration should be given to reshaping the contracts so as to take BA out of the contractual loop and position them as a POCL client.”

Stephen Byers: Yeah.

Mr Beer: What was the significance of that that you wish to draw to our attention?

Stephen Byers: I think I mentioned earlier that the – one of the big problems we had was effectively having two clients, BA and POCL, and this is the first sort of indication that we should be looking at a much more streamlined approach where there is only really one client, which is POCL, and that we take BA out of the equation.

This is saying that, provided BA have a system which they’re satisfied with, it works both in test and in practice, then we could remove them from the sort of contractual arrangement and just have one client which would be POCL.

So we’re trying to remedy some of the major deficiencies in the contract that we inherited from the previous administration.

Mr Beer: What was your view overall of the outcome of the Corbett attempt?

Stephen Byers: To be honest, I didn’t make as much progress as I – as we would have wanted, the parties were still not working together, I think Graham himself – I’m trying to recall – I think he said to me that he wasn’t sure there was a continuing role for him to play.

Mr Beer: That’s what I was about to ask you about.

Stephen Byers: Sorry.

Mr Beer: That document can come down now. What continuing role did Mr Corbett, in fact, play, as envisaged by the terms of reference of his appointment?

Stephen Byers: To the best of my recollection, I think Graham told me that he’d got as far as he could with the parties. That’s my recollection.

Mr Beer: Is it right that he didn’t have any further role, contrary to what had been envisaged by the terms of reference?

Stephen Byers: Yeah. That’s correct, that’s correct.

Mr Beer: Why did he think he’d got no further role to play?

Stephen Byers: I think he’d got as far as he could with the parties and he couldn’t see that his continued involvement would add value to what we were trying to achieve.

Mr Beer: The terms of reference thought that there should be a continuing role for the independent –

Stephen Byers: Yeah.

Mr Beer: – troubleshooter, in the event that the project proceeded.

Stephen Byers: Yeah.

Mr Beer: Was that role taken up by him or anyone else when –

Stephen Byers: No.

Mr Beer: – the project did proceed?

Stephen Byers: No.

Mr Beer: Do you remember why that was?

Stephen Byers: I –

Mr Beer: Sort of an honest broker?

Stephen Byers: Yeah, I think the view was that sort of troubleshooter role, we’d tried it and it hadn’t really been that effective.

Mr Beer: Thank you.

Can we turn to December 1998, please, and look at CBO00100001. Thank you. If we can just enlarge that to make it a bit clearer. Yes, sorry, I should have said at 76. Thank you. That’s better, thank you, and again enlarge it, please. Thank you.

This is a letter from Keith Todd – if we just scroll down, on the right, again, we can see that, back up, please – to you of 9 December.

So a letter from the chief executive of ICL to you. I’m not going to take you to your letter of the 20th. You had written to the parties and set a deadline to arrive at heads of agreement, and you were looking to ICL to make what was described as a speedy and decisive move.

Do you remember that?

Stephen Byers: Yes, I think the letter of the 20th followed on from the Corbett proposals or recommendations.

Mr Beer: Was that a different way of attempting to break the deadlock?

Stephen Byers: I think so.

Mr Beer: It’s been suggested in some of the evidence that the Inquiry’s received that it was Government that was responsible for the deadlock here and that 1998 was essentially a lost year because of the internecine squabbling between two departments of State, DSS and DTI. Does that reflect your recollection?

Stephen Byers: I wouldn’t – there … there were clearly disagreements between those two entities, whether I would describe it in quite the way that you have, I’m not sure I would, but there were clearly disagreements, yes, and this goes back to the point about having two clients to the contract with quite different objectives and, you know, different cultures.

Mr Beer: If you can just scan through the letter –

Stephen Byers: I should also add, by the way, that it’s not helped by the fact that ICL were overbudget and way behind schedule.

Mr Beer: They had suggested in turn that was because of the delay and that delay itself in making a decision was causing them to lose millions on a monthly basis.

Stephen Byers: I think ICL had a lot of responsibility.

Mr Beer: They say ICL in the end of the second paragraph:

“… in the interests of resolving the impasse I am prepared to make a ‘speedy and decisive move’.

“A major criticism of ICL’s proposals … appears to have been that ICL sought …”

I should just stop there. I haven’t, in the interests of time, taken you to the immediate November exchanges –

Stephen Byers: Sure.

Mr Beer: – that immediately postdated the Corbett –

Stephen Byers: Corbett, yeah, I get that.

Mr Beer: “… to transfer risk back to the public sector. The impression was also created that Fujitsu was in the process of withdrawing its support from the Pathway project. There was also a view that the ICL proposals in the Commercial and Contractual paper representing unacceptable price increases.”

Then they say they’re going to address these points.

He says that he has discussed this with Fujitsu and the chairman of the ICL Plc board, “both support my proposal”, it’s our best offer:

“I have no hope of persuading my shareholder or my Board to give me further room to move.

“First [Fujitsu] is prepared to fund the whole project. This represents an investment of £600 [million].”

Of what significance was that?

Stephen Byers: I can’t recall.

Mr Beer: Scrolling down, please:

“… we have revised and restructured our commercial proposals”, with the last iteration of the Corbett proposals in the second column and then ICL’s proposal in the third.

Then that’s the amount that the public sector would contribute, and you will see that there’s £90-odd million difference between them in the totals at the foot of the page.

Stephen Byers: Yeah.

Mr Beer: Then over the page, please, “ICL” – after the footnotes – sorry, after the bullet points:

“ICL is also prepared to accept an even higher degree of risk. Under … ICL’s NPV loss has increased to £118 [million].”

Then scroll down, please:

“The other main features of our offer are as follows …”

He then sets them out:

“This offer represents an enormous commitment for ICL and one that can only be justified if we have confidence in the contractual arrangements, and the commitment of ministers, moving forward.”

Just stopping there, the impression that’s given by this slew of correspondence is that this has been taken out of the POCL board’s hands; is that right? This is direct communication between/negotiation between a contractor and a Secretary of State?

Stephen Byers: Yes, I think the effect of appointing Corbett to conduct his review meant that, ultimately, it would be – the chief secretary would be looking at the various funding requirements, whether risk was being transferred from ICL to the public sector or whether risk was going to remain with the contractor. So I think that’s true. We would consult the POCL board, obviously, but the ultimate decision would be taken by government.

Mr Beer: That’s what I wanted to ask you about. How would the POCL board be consulted?

Stephen Byers: I think our officials would be engaged in dialogue, correspondence with them, talking to them.

Mr Beer: And consulted in the sense that their views might be taken into account but, ultimately, the decision rested with Government?

Stephen Byers: That would be the case, yeah.

Mr Beer: Why was that the case, given that POCL was an independent company, limited by guarantee?

Stephen Byers: Two principal reasons, I think. First, that we wouldn’t – we wouldn’t want, under a PFI contract, for risk to be transferred back to the public sector. It had to remain with the contractor. That’s the whole point of PFI contracts. And, secondly, in the end there would be a call on the public purse and therefore it would be right that the Government took responsibility for that and we’d have to sign off on it.

Mr Beer: Over the page, please, at the foot of the page, under “Acceptance”:

“Following detailed discussions, progress has been made on Acceptance. The parties have agreed that Acceptance will be completed prior to the start of National Rollout and is not linked to NR2+.”

What did you understand acceptance to be or to mean?

Stephen Byers: I can’t remember now.

Mr Beer: So would it follow that if I ask you what the significance of an agreement that acceptance would be completed before national rollout, you wouldn’t be able to assist?

Stephen Byers: What I can recall is that we would not have – we wanted to make sure, and this was through the live trials, that the system worked in practice. Now, whether that’s relevant to this particular paragraph I’m not sure. I can’t recall.

Mr Beer: I understand. Can we move forwards, then, please, because there’s a follow-up letter nine days later, HMT00000001, please.


Mr Beer: I’m getting a shake of the head. I’ll count my 0s again. Yes, HMT00000001. Good.

Can we just read through this. So this is a follow-up letter, this is 18 December now, nine days later:

“Since my letter to you …”

I should have said this is from Keith Todd again to you:

“… there have been a number of meetings as a result of which ICL has clarified and refined its proposal as set out in that letter.”

So it turned out that the statement that “this is now our last and best offer” was superseded:

“Accordingly, since I believe a decision by Ministers on that proposal is imminent, I felt it would be useful to write to you today to summarise the current status of our proposal.

“First, POCL requested clarification of the nature and extent of Fujitsu’s support for ICL. We have confirmed that this will be delivered by way of a legally enforceable performance guarantee from Fujitsu (in favour of the Sponsors) covering all of ICL’s obligations in relation to the project, including the provision of all necessary funding.

“Second, we have held further discussions to clarify the issues surrounding our proposals on Acceptance. We have reached complete agreement on all issues relating to Acceptance with POCL. This agreement is embodied in a detailed paper, a copy of which is with your officials. This paper has been discussed with BA, but has not been agreed with them.”

To what extent, at this stage, did you understand that ICL was negotiating with the two separate elements, POCL and BA, separately from Government?

Stephen Byers: Yes, I mean, I think we were expecting that, because the contract was between those three parties.

Mr Beer: Would you or your officials have a way of checking back whether what is said in these letters to you was accurate?

Stephen Byers: Yes, I would have thought so.

Mr Beer: That would have been done at official level, would it –

Stephen Byers: Yes.

Mr Beer: – by going back to POCL and BA?

Stephen Byers: Yes.

Mr Beer: “Third, we have held further discussions with POCL to clarify issues relating to our commercial proposals. Again, we have reached agreement with POCL, on the fundamental principles which will allow us to develop a definitive, detailed, legally binding agreement with them in due course. The agreement has imposed increased volume … on ICL.

“Fourth, although we have not had any direct discussions with BA, I think it is helpful to state ICL’s position … The proposal of 9 December … included an increase of £8 [million] over the Corbett proposal. In the interests of reaching a speedy conclusion, I have reluctantly agreed to renounce that increase.”

So a giveaway, essentially, by ICL of £8 million.

Then over the page, please:

“Fifth, ICL has done some further work on the proposals … to use the Horizon infrastructure for the delivery of ‘Better Government’ … We have written a further paper, copies of which are with your officials. I attach a copy for your reference.”

Can we go to that, please, it’s on page 3 of this document?

Stephen Byers: Mr Beer, before we move on from this letter, I think there was an important element linked to the £8 million concession.

Mr Beer: Yes.

Stephen Byers: And the condition was that the Secretary of State for Social Security would then be prepared to sign off or be positive about the whole Horizon thing.

Mr Beer: Yes, that’s at the foot of page 1 –

Stephen Byers: Yes.

Mr Beer: – on to page 2?

Stephen Byers: I think that’s important because Alistair Darling was very strong, and this links back to the acceptance point, I think, about the importance of live trials. If I remember correctly, I think the Department of Social Security had had a contract with another contractor which had gone badly wrong and Alistair didn’t want to repeat those mistakes. So this was an attempt, I think, to try and get Alistair to withdraw some of his conditions, to give it approval.

And that context, I think, is important in terms of how ICL were looking at this, because they were never keen on live trials for Horizon.

Mr Beer: That context that you’ve just referred to, is that the same issue that you mentioned right at the outset when I asked you questions, of the DSS being in dispute with a contractor over the provision of IT?

Stephen Byers: Whether that was the same contract, I’m not sure, but there certainly was an issue, because I remember in some correspondence Alistair refers specifically to a problem they’ve had with a particular contract which he identifies. I think it may be in the bundle of documents somewhere.

Mr Beer: We’ll chase that down. You can’t remember whether that was ICL or not?

Stephen Byers: No, I can’t recall.

Mr Beer: Can we look at the attached paper. Thank you. This is the paper that Mr Todd was providing you with. Can we look at “The Pathway Infrastructure”:

“Pathway technology [this is what ICL say] is based on the latest specification PCs with Microsoft NT operating system, running in a highly secure high-capacity managed network reaching the 19,000 Post Offices. The PCs are equipped with barcode, smartcard and magstripe card readers and receipt printers from first installation, and are driven by icon-based menu systems accessed via touchscreens. All these technologies have been in successful use in 200 pilot Post Offices over the last year.”

Just stopping there, “all of these technologies have been in successful use in 200 pilot post offices over the last year”, did you know whether that was accurate or not?

Stephen Byers: I was going to ask you the question: is that correct?

Mr Beer: What was your state of knowledge at that point, that there had been –

Stephen Byers: I don’t think it’s –

Mr Beer: – all of those technologies in successful use in 200 pilot post offices over the last year?

Stephen Byers: I’m not sure that’s a fair reflection of the reality.

Mr Beer: To what extent would a statement like this from ICL to you and to Government have influenced it?

Stephen Byers: Not very much.

Mr Beer: They continue:

“The applications software is the world leader for new generation counter automation and is web enabled, allowing straightforward addition of further internet/intranet services. The central hub systems provide data routing, information management, client gateways and security management, including Card Management Services … Military levels of security including Postmaster Smartcard log-on and data encryption … lead to high levels of confidentiality and trust. Touchscreens, icons and user driven menus generate ease of use and staff and customer confidence.”

Now, to what extent would this kind of narrative influence you or would you write it off as sort of advertising puff?

Stephen Byers: That’s exactly the words I was going to use, Mr Beer. It’s … it’s straight out of the PR department for the company, I’d have thought.

Mr Beer: What, if you thought it was advertising puff, would you take from it that it is being given to the chief secretary to the Treasury in all seriousness by a contractor?

Stephen Byers: I … I would have – I would have seen it as overpromoting what they could deliver, but I think the context was that ICL wanted to become the sort of IT provider of choice for the Government in relation to – we had a sort of government modernisation programme, and it was called “Modernising Government” actually, and companies like ICL wanted to be part of that, and to play a role because, obviously, commercially, it would be very valuable for them, and this is a sort of – it’s a promotional paper to show how they can assist in what the Government is trying to achieve as part of that wider agenda of modernising government.

Mr Beer: Can we look, please, at BEIS0000417. We can see that this is a letter to you from Alistair Darling, he having been provided with a copy of the first letter –

Stephen Byers: Yes.

Mr Beer: – from Mr Todd, the 9 December one.

If we just go to the second page, please, and the second paragraph:

“On the specific conditions that the proposals seem to involve, I could not agree to the proposed approach to ‘acceptance testing’. ICL persist in asking for acceptance on the basis of a laboratory test of the systems, as opposed to a live trial – particularly important when for our customers it is the service that is the crucial end product. In fact, the approach being suggested by ICL is almost exactly that followed under the NIRS2 project, where the system was fully accepted in a test environment but did not work in the field. I am not prepared to sign up to another NIRS2 experience! In any event, when we are talking about a system which is affecting around 15 million people, many of whom are dependent on timely and accurate payment of their benefits for their livelihoods, the political risks are huge if the system is not tested properly beforehand to make sure it works. This is a risk I am not prepared to take.”

Is that the reference to the past bad experience to which you were referring?

Stephen Byers: Yes, that was the project I was trying to recall, yeah. But I don’t know whether that’s an ICL project, though.

Mr Beer: No.

So what was your view, then, of the paper that had been delivered to you by Mr Todd, the “Modern Government” paper? I mean, I haven’t read to you all six pages.

Stephen Byers: I think I’m grateful. I mean, the important point here, from – and this is why Alistair was absolutely right, is that we could not countenance proceeding without live trials and the reality – if you then read across to the paragraph that you’ve drawn the Inquiry’s attention to, you know, we did not have the examples that they gave in that paragraph at the time that that publication was made.

Mr Beer: Thank you. Can we go to paragraph 33 of your witness statement, please, which is, I should have said, on page 13. You say:

“… the financial consequences of any decision made as to the future of Horizon were a crucial consideration. Cancelling the project would have meant writing off hundreds of millions of pounds of public and private investment in a project which … was technically viable. There was also the risk of protracted and costly litigation with ICL if the project was cancelled.”

Now, we know now through, amongst other things, the decision of the High Court and the Court of Appeal in this case, that the system that was eventually rolled out was not remotely robust and a number of subpostmasters have given evidence to the Inquiry in February to May of this year to the effect that the Horizon system produced multiple unexplained shortfalls which they were unable effectively to check or to dispute. They’ve said that they received inadequate training and assistance provided by the Horizon helpline.

Looking at the matter now, with the benefit of hindsight, do you think that the financial consequences of terminating the project were prioritised over the need to ensure that, if the project did survive, it would be properly suited to the needs of the subpostmasters who were required to operate it on the ground?

Stephen Byers: I think there are two things I’d like to say to address that. Firstly, that the possibility of cancelling the project was certainly a live consideration that I had when I was chief secretary, and that I looked at in some detail, and concluded that, actually, cancellation would not be the right way forward.

And I probably felt that even more strongly when I became the Secretary of State for Trade and Industry, given the responsibilities I had there.

In proceeding with ICL – and we had no indication, as ministers, of the sort of operational difficulties that you’ve referred to, Mr Beer, they were never drawn to our attention. What I think we did do, which was right in the circumstances, bearing in mind that we were breaking new ground and it was a very ambitious project – it was ambitious for the Post Office network and I think that was right in the circumstances.

When we got the settlement, I think it was in May 1999 in the end –

Mr Beer: Yes, it is.

Stephen Byers: – when we tried to sort of reconfigure the whole thing, you know, we dropped the Benefit Payment Card; got one client, as it were, which was POCL; we moved away from a PFI to a more traditional standard design and build project. So we’re trying to remedy some of the faults in the contract we inherited from the previous administration. But, because we were breaking new ground, we wanted to make sure that as the live trials were continuing that we would be alerted to problems that may occur, which is why we set up, under the chairmanship of Ian McCartney, the Horizon Working Group, consisting of all the relevant parties, including the subpostmasters, so that we, as ministers, could be alerted if there were problems with the rollout and then we could act accordingly.

Mr Beer: The Inquiry’s heard evidence that, because of the nature of the PFI agreement, which was in operation and effective up until May 1999, Post Office Counters Limited had very limited visibility from Pathway on the technical details of the high or low level design of the Horizon system. It’s been suggested that Pathway insisted that, so long as they delivered the outcomes that were required by the specification, it was not a concern of the Post Office as to how those outcomes were delivered.

When the contract was renegotiated in May 1999, do you remember that issue being brought to the Government’s attention?

Stephen Byers: I don’t think it was.

Mr Beer: It’s been suggested that a trick was missed in that, in the renegotiation, there was a failure to ensure that the technical information that had been denied to them was now provided to POCL. Was that an issue that you in government were made aware of?

Stephen Byers: We were not made aware of that.

Mr Beer: Coming, then, to May 1999 – and I realise I’ve moved forward at some pace – can we look, please, at POL00028610. If we can just look at the next page, please, at the foot of the page, you will see that it’s from you but has been approved in your – or signed in your absence but approved by you.

Back to the first page, please. There isn’t a date but, in the top right, if we just scroll up a little bit, “Received: Sunday, 23 May”, that’s 1999.

It’s to Dr Bain of the Post Office, can you just read through it with me. You say:

“… there has been a long and detailed examination of the project. My Ministerial colleagues and I consider that the right way forward is to reconfigure the project without the Benefit Payment Card rather than to terminate it. The attached documents set out the core elements of such a reconfigured project.

“You will … be aware that Fujitsu have made clear that they are only prepared to hold … the offer in these documents until midnight today … 23 May [it being a Sunday]. The offer would involve them taking a significant provision in their Accounts which will be published on 25 May. If the offer is not accepted today, their provision will be larger and they have said that, in these circumstances, they would only be prepared to reconfigure the project in this way on the basis of a considerably higher price than that currently on offer.

“My colleagues and I believe it is desirable that the Post Office signs the deal on offer today. It offers early automation of post offices and a platform from which to carry forward [POCL] strategy of network banking and modern government services.

“In your letter of [the 18th] you raised certain issues …

“First, the timing of the move by the Benefits Agency to compulsory ACT. [This] offers substantial efficiency savings to the Benefits Agency and the impact of delay is very costly. Despite this I have agreed with my colleagues that, if the Post Office were to sign the deal on offer today, the move would not start until 2003 and [it’s difficult to read] there would be no change in the present arrangements under which the benefit recipients can freely choose the payments method which best suits their needs unless a change has the prior agreement of the Post Office.

“Second, funding and income. The cost of the reconfigured project is expected to have a significant impact on the finances of POCL in the next few years. In recognition of this, the Government would be willing to agree that £480 million of the cash investments, including gilts, held by the Post Office should be transferred to POCL on the signing of the Codified Agreement in July. POCL could draw down the £480 million at their discretion … This money would otherwise pass to the Government together with the rest of the £2 billion plus of these investments in 2002-2003 …

“No doubt POCL would seek to exploit automation to attract new business and income. The more successful they are in this regard, the longer the £480 million would, of course, last.

“Third, the use of the infrastructure for Government services. It is clearly the hope of Ministers that the Post Office will be successful in retaining and winning business on merit. We firmly believe that competition for this business should be on the basis of a level playing field … We do not believe that it is in the interests of delivering efficient and effective services to customers that competition should be biased … The Post Office should do well in such environment in view of its unrivalled national network and the public trust … it enjoys.

“Against this background I hope that your Board will be willing to sign the enclosed letter and schedules today.”

This appears to have been received at 4.19 by fax from the Treasury, “Re: signing”, the next day – a Sunday, for signing on the Monday.

Was this you putting POL under a degree of pressure?

Stephen Byers: Under time pressure, yes. It’s a generous offer.

Mr Beer: It’s a general …?

Stephen Byers: Generous offer to POCL. I remember some very detailed conversations with the Treasury about being allowed to provide this £480 million of cover.

Mr Beer: The £480 million in gilts?

Stephen Byers: Yeah.

Mr Beer: What’s the significance of the gilts?

Stephen Byers: That’s money they can – that allows them to borrow on. And the issue with the Treasury, if I remember correctly, was that – because I think this ran to 2003 –

Mr Beer: Yes, that’s right.

Stephen Byers: – was that I think it was quite lumpy, in terms of which years bits of money fell in and we’re trying to even it out over a period, make it easier financially.

Mr Beer: You refer in the letter to the prospect of increased costs in the event of delay, you refer to the inducement or what I’m describing as an inducement of other work post automation, you refer to the £480 million in gilts. As well as time pressure, was that pressure, or just sort of advocacy?

Stephen Byers: I think it made – should have made it an attractive proposition for the POCL board, yeah –

Mr Beer: I don’t think you will have had the opportunity to study Lord Darling’s witness statement to the Inquiry.

Stephen Byers: No.

Mr Beer: In it – we needn’t look at it, the cross-reference is WITN04200100 at paragraph 63, page 22; and paragraph 101 on page 34.

These suggest that the letter that you wrote to Dr Bain wasn’t fully reflective of your personal view, because you believed initially that Horizon was the wrong decision in the first place.

Stephen Byers: Yeah.

Mr Beer: Is that accurate?

Stephen Byers: I think, as I said earlier this morning, I couldn’t – I had those four fundamental questions about how we’d ended up with this nightmare of a contract, which I didn’t get answers to, and I’ve taken the Inquiry through them. You know, why was it the Benefit Payment Card? Why was it a PFI? We didn’t have details of the tendering process –

Mr Beer: Sorry, by now those things had fallen away.

Stephen Byers: Well, they were still relevant, and that’s why I think, if Alistair Darling is saying – commenting about my view of Horizon, it may well be reflecting those questions that I think all of us were raising, to be honest, I think Alistair was raising them as well.

Mr Beer: Would it be fair, and no criticism is intended of you here, because you were, of course, bound by the principle of collective cabinet responsibility, but now freed from that convention, would you agree that the project proceeded because of the threat of reputational harm to Government in losing this cherished contract?

Stephen Byers: It proceeded because – look, there were no good options available to us, so we had to make the best of a very difficult situation, which I think is what we tried to do.

Mr Beer: It proceeded, would you agree, because of the risk to inward investment, in particular from Japan, and the prospect of a diplomatic incident?

Stephen Byers: At the time that this was under consideration, the key issue involving – and I know this as Secretary of State for Trade and Industry – was linked primarily with Nissan and Toyota, the big car manufacturers. Their concern was the fact that we were not joining the single European currency, that was their big issue, and this would be a very minor factor in that – for their consideration. So I think too much could be made of that, actually.

Mr Beer: It proceeded because of the level of sunk costs and the harm that would be caused to Government and its reputation by the loss of those sunk costs?

Stephen Byers: That was one of the reasons. The other reason, which I think is important for the Inquiry to be aware of, was it would have had a devastating impact on the Post Office network. You know, we had postmasters and mistresses who had invested, as we were told, about £1 billion of their own money in getting the property and goodwill of post offices. That would have been devalued overnight had we cancelled the Horizon project.

So there are a number of factors about how – why it proceeded.

Mr Beer: Was one of the factors that it proceeded ever brought into account that it was a good and reliable system?

Stephen Byers: We wanted to ensure it was a system that worked, which is why we put in place, as ministers, mechanisms and procedures to alert us to any problems if they arose during that rollout period.

Mr Beer: By this time –

Stephen Byers: And insisting on –

Mr Beer: Sorry.

Stephen Byers: And insisting on live trials to make sure we could see how it worked in practice.

Sir Wyn Williams: Mr Beer, I’m very sorry to interrupt, but I’m going to have to adjourn for two or three minutes. I know that’s very inconvenient at this moment but will you bear with me, please?

Mr Beer: Yes, of course, sir. We will just simply turn your camera off at this end and we will remain in the room.


Sir Wyn Williams: By way of explanation, the weather is extremely bad at the moment, which had set our alarm off, and I wanted to ensure that you didn’t get an alarm going off in the middle of proceedings, Mr Beer.

Mr Beer: Thank you very much, sir. Are you now ready to proceed?

Sir Wyn Williams: As ready as I’ll ever be, yes.

Mr Beer: Thank you very much.

Lastly, can I suggest that the project proceeded because of the wish to avoid litigation?

Stephen Byers: That would be one of the factors as well, yes.

Mr Beer: I’ll ask again: was the quality of the system to be delivered, its reliability and integrity, ever consciously taken into account in the decision-making, as at May 1999?

Stephen Byers: I think we wouldn’t have proceeded had we – had it been a system that wasn’t going to function properly and deliver what we wanted for the Post Office. Now, as ministers, we wouldn’t – we wouldn’t be involved in the sort of operational detail of that. What we could do as ministers was to set up structures to – as I think I may have said earlier, to alert us to any problems if they arose.

So we had the Horizon Working Group, which had representatives of the subpostmasters, the CWU union, and that was meeting and one of its terms of reference was to report on these matters and how it was being delivered in practice. And we also had an ongoing dialogue with the Federation of SubPostmasters, I would meet their national council, I spoke at their annual conference in 2001, so there were those sort of opportunities for ministers to be alerted to problems if they arose.

Mr Beer: Did the Federation ever raise problems on behalf of its members in the operation or integrity of the Horizon system or did they generally paint a rosy picture to you?

Stephen Byers: They painted a rosy picture and I think, you know, their evidence to the Select Committee for Trade and Industry, which was looking at this issue, seemed to say that –

Mr Beer: Particularly rosy?

Stephen Byers: Very positive, and when I’d met their council in, I think it was March 2000 – I think the Inquiry’s got a note of that meeting –

Mr Beer: Yes.

Stephen Byers: – there were – no problems were raised with me.

Mr Beer: No. Was that your route back into the subpostmaster community, through the Federation?

Stephen Byers: It would be, and I think and all through my constituency work. You know, in North Tyneside, Wallsend, we had postmasters, we had post offices and, occasionally, they would raise issues with me, but this was never raised.

Mr Beer: Can we turn forwards, please – I am coming towards the end of my questions now – to February 2001, and look, please, at CBO00000002.

This is a letter from you of 9 February to the Prime Minister’s private secretary.

Stephen Byers: It would be from – it wouldn’t be from me, it would be from the head of my private office, I think.

Mr Beer: Yes, your private secretary, I think.

Stephen Byers: Yeah, yeah.

Mr Beer: What’s the distinction to be drawn there?

Stephen Byers: I would write to the Prime Minister, my private secretary would write to the private secretary of the Prime Minister.

Mr Beer: But this expresses your views?

Stephen Byers: It would do, yeah.

Mr Beer: Thank you. The emboldened part tells us what the letter is about:

“It is probably now inevitable that the number of post office closures in this financial year will reach a record high. This note sets out the causes and what action we are taking to address the problem.”

I’m going to deal with it briefly. In the first paragraph it says the main reason for the recent increase is the move to payment of benefits by ACT from April 2003 “before we had in place a clear strategy to deal with the impact on the … network”.

Then if we go over the page, please, and look at the foot of the page:

“From recent research conducted by the Post Office into the reasons for … resignations it is clear that most close their offices because of personal circumstances and less than 10% cite financial viability as the reason. Analysis of the reasons given for resignation over the last 6 months have been …”

You will see them set out there, and one of them is the Horizon computerisation, 6 per cent of resignations.

Was that significant in any way?

Stephen Byers: Well, it’s significant –

Mr Beer: People are resigning because of the computer system that we have introduced?

Stephen Byers: Yes, I think if I recall correctly the – it was people who probably were – probably the age I am now, who didn’t want to face the prospects of technology that they were unsure of. We had introduced, you know, training sessions and helplines, but I think the whole sort of computerisation was something that perhaps they didn’t want to go through.

Mr Beer: So you put it on a – or you thought about it through a sort of age –

Stephen Byers: And people not wanting to embrace change, I guess, which can be sort of a bit – can be challenging and uncomfortable for people.

Mr Beer: Rather than any issues with the system?

Stephen Byers: That’s certainly how I read it at the time, yeah.

Mr Beer: Was it drawn to your attention at this time that a significant number of subpostmasters were having a recurrent serious issue with balancing on a weekly basis?

Stephen Byers: No, that was never drawn to our attention.

Mr Beer: Can we go forwards, please, to CBO00000001. Again, I think this is from your PPS, Bernadette Kelly, to the private secretary to the Prime Minister, but again your views, essentially.

Scroll down, please, so this is six days later:

“Your letter … recorded the Prime Minister’s concern at the continuing high rate of Post Office closures. This letter responds to your requests”, et cetera.

Then in the third paragraph:

“As my letter of 9 February said, net closures for the nine months April to December 2000 were 434. We now have the January figure which is 47 … If February and March were at the monthly average for the year … the total net closures for the full year would be 577. The final figure could exceed this, particularly if the completion of the introduction of Horizon (the new IT platform) continues to ‘bunch up’ retirements and resignations which might have otherwise taken place over a longer period …”

Why would the introduction of the Horizon platform ‘bunch up’ retirements and resignations that would have taken place over a longer period?

Stephen Byers: I think the final part of that sentence explains that, it says “those who don’t want to train to use computers decide to call it a day”, and that was information I recall I was being given, that it wasn’t because of accounting problems, it was actually that people were not wanting to train up to use computers.

Mr Beer: So does it come to this: that you in Government were never told – even at this stage, February 2001 – of continuing problems with the operation on a weekly basis of the Horizon system by a significant number of subpostmasters?

Stephen Byers: We weren’t, and we’d actually – the thing that sort of frustrates me here is that we had deliberately, after the May 1999 new deal, the settlement that we achieved, we set up the Horizon Working Group with the Minister of State responsible for the Post Office chairing it, with representatives of – well, of POCL, of the Benefits Agency, but also the Federation of SubPostmasters, the CWU, and that was the vehicle that we deliberately – and this is an unusual body to set up in government, to have all of those parties together, and we’d done it deliberately so that if there were problems, as we moved forward, then ministers could be alerted to those problems. And I think, as the minutes and records of the working group show, to my recollection, at no stage were ministers alerted to the problems that you’re mentioning.

Mr Beer: That’s all the questions I have for you, Mr Byers, save for one: in your statement, at the beginning and at the end, you make statements of a general nature about having reflected on what has occurred and the losses and harms that have been caused. I ought to give you the opportunity to say anything that you wish to say in that regard.

Stephen Byers: Well – and I don’t want to take up the time of the Inquiry, but my comments right at the very end are broader, I think, about – and they’re comments made in the light of what I’ve seen reported in the press. And what I don’t understand in this whole scandal is how government ministers, given they were being alerted to the problems through adjournment debates, through constituency correspondence, parliamentary questions, how they managed to ignore all of that, and it could well be because they’d almost become captured by their department.

There is a funny relationship, quite often a difficult relationship, between government ministers and their civil servants, and sometimes government ministers, because they’re working with those civil servants day in, day out, may reflect the views of the civil servants. What government ministers have got to do is always to challenge and question and disagree where necessary.

And so the points I make at the end is whether – and this just – this may seem inadequate in the circumstances of this, the awful things that have happened to so many people. Ministers need to be trained to be government ministers. We’re Members of Parliament but then you move on to a totally different role when you’re in government. And part of that – and we’re fortunate because, although we did it in private, there was a good chance in 1996 that we would form the next government, so we had training to what we should be doing as government ministers and, part of that, was to listen to advice, yes, of course, but to be ready to challenge and disagree where that was necessary.

And it may well be that a more structured approach may be of benefit. So that’s why I made those sort of final comments at the end.

Mr Beer: Thank you very much, Mr Byers. There will be some more questions for you.

Mr Stein: Sir, good morning, if it pleases you, I’ll proceed with questions on behalf of the group I represent.

Sir Wyn Williams: Yes.

Questioned by Mr Stein

Mr Stein: Mr Byers, I represent a large number of ex-subpostmasters, mistresses and managers, all of whom experienced the problems thrown at them by the Horizon system.

Can I just pick up on a point that was raised earlier by Mr Beer this morning, and, sir, for your records it’s at point 14.1 in the time recording on our system.

You were asked about the question of whether you were aware that the Horizon system was generating evidence that was being used for the purposes of investigations and prosecutions. I think Mr Beer put it as being prosecutions, but it was being used for investigations and prosecutions.

Your answer to that was no. Okay?

So, as a starting point, can we just analyse the position that, in a way, you’ve just discussed with Mr Beer, which is about the operation of the Civil Service and briefings that you were given about this.

So can you help from your recollection whether you were given any briefings by the Civil Service as to the operation of the Horizon system and its connection with investigations and prosecutions?

Stephen Byers: My recollection is that we were provided with no advice or guidance or information relating to those matters.

Mr Stein: Now, the system of being briefed by the Civil Service is often perhaps misunderstood. You, as a minister, are in fact very busy, your diary is controlled entirely; do you agree?

Stephen Byers: Not controlled. I mean, I think one of the – one of the lessons that we learnt in our seminars ahead of coming into government, was not to allow your diary to be controlled by your private office, that you take control of your diary and you attach your own priorities to it.

Mr Stein: Right. The busy part, though, of my question, you’ll agree with: your diary was busy?

Stephen Byers: It was – it’s the busiest I have ever been in my life, being a government minister, yes.

Mr Stein: That means, in terms of information getting to you, you are very reliant or entirely reliant upon the briefings being given to you by the Civil Service?

Stephen Byers: That’s correct.

Mr Stein: So this question of not being told that the Horizon system was going to be used as the basis for investigations and prosecutions, do you believe now, looking back, that the Civil Service should have provided you with information linking the Horizon system to investigations and prosecutions?

Stephen Byers: If they had that information available at the time, I’d have thought it’s something that they would have been sharing with the relevant minister.

Mr Stein: Right, so this may, in fact, go back a step to what did the Civil Service learn, what were they told?

Stephen Byers: Yes.

Mr Stein: Okay.

Now, then let’s look at your own set of knowledge. The Post Office, originally as the Royal Mail, is in fact, we believe, the oldest prosecution and investigation body in the world. Did you know that?

Stephen Byers: No.

Mr Stein: When I ask whether you knew that, I ask at the time of you taking responsibility for these matters.

Stephen Byers: I wouldn’t have known at the time that it was a prosecuting authority, no.

Mr Stein: Because of that, are you saying that you therefore weren’t on notice that you should be asking questions about it?

Stephen Byers: (Pause)

I’m trying to recall what I was told at the time, which is difficult, you know, we’re looking at 22 years ago. I would have expected – and this is an expectation, that we would have – that there would have been – there would have been political oversight of the approach to prosecutions.

Mr Stein: By?

Stephen Byers: That we would have laid down guidance and some rules.

Mr Stein: The guidance and some rules, who would they have come from, who would have issued these guidance and rules. Would that have been a more junior minister?

Stephen Byers: It would have been – it would – the detailed work would have been done by a Minister of State, whether it would come up to a Secretary of State, I’m not altogether sure, to be honest. I think it would have been dealt with at probably a lower level.

Mr Stein: Right, and this expectation that this would have been looked at and dealt with by perhaps a more junior minister, why do you come to that view, sitting there now, so many years later? What’s compelling you to think about that as being something that should have been done?

Stephen Byers: It’s the – it’s the sort of issue that would have – that would have come across – that would have been dealt with at a political level, I think.

Mr Stein: Yes, forgive me one moment.

Stephen Byers: What I’m not sure, I mean, what would be interesting for the Inquiry, I think, is to find out whether there were any guidance – and you may already be aware of this – whether there was any guidance that had been provided as to the background for prosecutions.

Mr Stein: Again, reflecting now on what you mean, do you mean guidance provided by – let’s go through the parties – by the Post Office?

Stephen Byers: I mean, prosecutions were taking place before Horizon, for a number of reasons. I’d always believed that the relationship with the Post Office and the network was such that there would be – there would be a – there’d almost be a dialogue about how, if there was a deficiency in the accounts, how that would arise.

You wouldn’t immediately move to a prosecution, you’d try to find out what’s gone wrong, what’s happened. And I think it seems to me – and this may be sort of going into areas the Inquiry will get onto later – that there was almost a change of approach by the Post Office in terms of how they dealt with prosecutions. It seemed to be a first port of call rather than something that would need to be properly looked into first. I could be wrong, but that’s – and this is just based on press reports.

Mr Stein: Right, this is basically what I was going to ask, whether this was information you’d been provided with or not?

Stephen Byers: No, it’s since I left Parliament, since the matters that are being, you know, that you’re – the people you’re representing, since they have been so badly affected by what happened, I think there’s been a different approach adopted in terms of prosecutions.

Mr Stein: One last matter, you have been asked a number of questions about the Ministerial Code and we know this is going to be dealt with in greater detail later on. Just in your experience as a minister, I think that you’ve taken over from Mr Mandelson, and I think Mr Darling, Alistair Darling.

Did you find that there was a consistency in approach to handover notes, so one minister leaving, you taking over, a handover note setting out that these are the points that we have been dealing with, you may find them useful, and so on. Was there any consistency or, I suppose, a rule in relation to handover notes?

Stephen Byers: No. No, it was all done differently.

Mr Stein: Thank you.

Questioned by Ms Page

Ms Page: Mr Byers, my name is Flora Page, I also represent a number of the former subpostmasters and people who worked for the Post Office.

My questions are about the Post Office board, the Post Office management, there’s not very many of them. If I may start, please, with correspondence that we’ve looked at already but which this section of we haven’t looked at. First of all, HMT00000055. This is, when it comes up, the letter from you to Mr Mandelson when he was in the post that you subsequently took from him.

If we go down, please, to page 2, paragraph 5, this paragraph reads as you, in your HMT role – “directing” may be too strong a word, but certainly giving a pretty clear indication of what you expect from Mr Mandelson in his role at the DTI, and you say that you look forward to him taking forward with the Post Office:

“plans to strengthen POCL’s management of the project;

“plans to give the management of POCL a much stronger commercial focus;

“exploration of possible partnerships between POCL and the private sector;

“a strategy for more transparent funding for POCL so we can be much more rigorous in defining what social value added is being bought;

“consider possibilities for further development of the system to support social banking and broader account-like services. (The Post Office would need to involve CITU and consult BA on this last point.)”

So there’s a few different points there, some of which I’ll just ask you to explain a little more about.

Plans to strengthen POCL as management of the project, did that arise because there were concerns that POCL had not been managing the project?

Stephen Byers: We had concerns because we were aware of the difficult relationships between POCL and the Benefits Agency and ICL, it’s one of the reasons why, you know, the Corbett troubleshooter role was created.

Ms Page: Then a strategy – I hope that the second and third points speak for themselves:

“a strategy for more transparent funding for POCL so we can be much more rigorous in defining what social value added is being bought …”

Does this refer to – we’ve seen in some of the correspondence from Mr Darling and, indeed, from yourself in your role at the Treasury, this issue around a sort of a hidden subsidy through the Benefits Agency, and so what you’re really referring to there is, if the Post Office needs subsidy to continue to have its social network and give the value that we all expect, then that needs to be transparent rather than hidden through a Benefits Agency cost which is unnecessary from a Benefits Agency point of view; is that what you’re getting at?

Stephen Byers: Yes, one of the – and there’s no documentation to show this, but I was sort of considering a fallback situation. If we had to cancel the project, then we may need to move to a direct subsidy of the Post Office network, and if we were to do that, then I’d need to be able to convince my political colleagues that there was social value in so doing. So I think that’s what I’m referring to there.

Ms Page: Yes. If we could then just look at the response from Mr Mandelson again, which is HMT00000048, and if we can go down to the second paragraph, I think, it says in terms:

“In particular I accept the remit set out in paragraph 5 of your letter. My objective within the initial timescale of one month will be as a minimum to agree with the Post Office Board the actions that need to be taken on each of the items listed; to ensure that practical measures are put in place as quickly as possible to take these actions forwards; to institute arrangements to monitor progress on a regular basis; and to be in a position to report back to colleagues such substantive progress as may have proved possible on each by the end of the first month.”

Do you have any recollection of that being put into effect, either by Mr Mandelson or indeed by you when you then took over his role?

Stephen Byers: I have no recollection of any action being taken on these issues ahead of my taking over at the end of December. Some of it would be subsumed in the work, because these letters, I think, are to do with setting up the Corbett troubleshooting role, so I think some of it almost got subsumed into that work. But I don’t recall anything further coming from Peter on that.

Ms Page: And, indeed, then something which you took up, any of these points around stronger management of the project?

Stephen Byers: I certainly think through our Civil Service we had – we had POCL on notice that they had to up their game.

Ms Page: Thank you. That document can be taken down.

What I’d like to do, just as a last issue to deal with, then, is wind that whole thing much further forward.

Are we able to take from that that you took the view, and perhaps others in Government did as well, that Post Office management was in need of some refreshment, shall we say?

Stephen Byers: You’re being very diplomatic. The Post Office at the time, and it may still be the case, faced huge challenges. I mean, it was a world that was moving and developing dramatically with new technology, and I think we had reservations about the ability of the board to deliver.

Ms Page: Yes. Well, then, as I say, going further forward, if I could ask for NFSP00000058 to be put up, this is a document from 19 March 2001 and I suspect that this is what you’ve alluded to already when you say that you spoke at NFSP meetings.

Stephen Byers: Mm.

Ms Page: Of course, at this point, you’re at the DTI. We can see from the heading there that this is a report of a meeting between you and the national executive council, that’s the national executive council of the NFSP.

Stephen Byers: This is 2000, yeah.

Ms Page: Oh, I’m so sorry, yes, 2000. What we see, if we go down, please, to page 3, towards the end of that page, so we see the paragraph that begins:

“The other thing that he intended [and I think I’m right in saying the ‘he’ here is you] to do shortly was that within the Post Office Board there was not really a strong non-executive director on the board with retail experience with responsibility for the Post Office Network. What he had always thought was that the needs of the Post Office Network had not always been taken into account at board level. He did not think that the Federation and the Network had received the degree of support, or been treated as a priority, that the Government felt that they should be as far as the Post Office board was concerned.”


“Certain requirements had been laid down to the board in relation to the Network but he thought that what was needed was to have a Post Office board director member who had specific responsibility for the Network and then it would be known that the person on the board was your advocate. They were looking to recruit a new person to the board with retail experience as they could help to understand what the Network could offer and hopefully some progress would be made on that in the next week or so.”

So that’s you telling the NFSP that, as far as you’re concerned, the Post Office board doesn’t really have a voice on there, that’s putting their concerns at the heart of the business; is that fair?

Stephen Byers: Yes, if I remember correctly, I think we did – we did insist that they made an appointment of a non-executive board member who had retail experience.

Ms Page: Your hope from that, from what we get here, is that that person would be an advocate on the board for the network and for subpostmasters?

Stephen Byers: Because of the retail element, that they’d have retail experience, yeah.

Ms Page: Did that reflect, at that stage, a concern that the board was not really listening to the network, was not really listening to subpostmasters, as they should have been?

Stephen Byers: I think that’s the clear implication of what I’m saying.

Ms Page: Thank you, those are my questions.

Mr Beer: Sir, I believe that’s all the questions that any of the Core Participants wish to ask.

Sir, you’re on mute still.

Sir Wyn Williams: Thank you, Mr Beer.

All that remains, Mr Byers, is for me to thank you for coming to give evidence and answering many questions about many different and varied aspects of this case. I’m very grateful to you.

Stephen Byers: Thank you.

Mr Beer: Sir.

Sir Wyn Williams: Mr Beer, before we actually adjourn, so that we can have a reasonable lunchtime, what’s the prediction for the witness this afternoon?

Mr Beer: Only Ms Hodge knows, because she’s taking Sarah Graham, not me, and I don’t know that information.

Sir Wyn Williams: All right. We will assume that taking an hour is all right; shall we do that?

Mr Beer: Yes, if we apply the presumption of rectitude that we need to finish at 4.15, let’s say 2.00, thank you.

Sir Wyn Williams: Okay, 2.00 it is, thanks very much.

(1.00 pm)

(The short adjournment)

(2.00 pm)

Ms Hodge: Good afternoon, sir, can you see and hear me?

Sir Wyn Williams: Yes, I can, thank you.

Ms Hodge: Thank you, our next witness is Dr Graham.

Dr Sarah Graham


Questioned by Ms Hodge

Ms Hodge: Good afternoon, Dr Graham. Please give your full name.

Dr Sarah Graham: Sarah Vivien Graham.

Ms Hodge: Thank you. You should have in front of you a witness statement dated 11 October of this year; is that correct?

Dr Sarah Graham: Yes.

Ms Hodge: I believe that statement runs to 19 pages in total.

Dr Sarah Graham: Yes.

Ms Hodge: Could I ask you please to turn to page 17 of your statement. Do you see your signature there at the end?

Dr Sarah Graham: Yes.

Ms Hodge: Is the content of that statement true to the best of your knowledge and belief?

Dr Sarah Graham: Since I wrote the statement, there is a small factual error on page 2, paragraph 5, at the bottom of that page. I said that the 1 billion Horizon Benefit Payment Card project was also the first PFI for an IT project to be attempted. What I should have said, that it was also one of the earliest and the largest PFI for an IT project to be attempted.

Ms Hodge: Thank you. Subject to that correction, is the content of the statement otherwise true to the best of your knowledge and belief?

Dr Sarah Graham: Yes.

Ms Hodge: Thank you very much.

As you know, I ask questions on behalf of the Inquiry. Your statement now stands in evidence, and I’d like to begin, if I may, just by asking you a few brief questions about your professional background.

Dr Sarah Graham: Yes.

Ms Hodge: Upon graduating from university you joined the Civil Service fast stream in 1976; is that right?

Dr Sarah Graham: Yes.

Ms Hodge: During your time employed in the Civil Service, you worked mostly in the area of social welfare; is that correct?

Dr Sarah Graham: Yes.

Ms Hodge: Your roles included policy development, business change, planning and implementation?

Dr Sarah Graham: Yes.

Ms Hodge: You’ve explained that your last role in government, prior to your retirement from the Civil Service, was as a director in the Prime Minister’s strategy unit; is that right?

Dr Sarah Graham: My last substantive role. I did, in fact, then take on some internal consultancy work within government.

Ms Hodge: Thank you. You have explained that upon leaving the Civil Service you undertook some consultancy work, that was external to government –

Dr Sarah Graham: Yes.

Ms Hodge: – and I think later returned to academia; is that right?

Dr Sarah Graham: Yes.

Ms Hodge: Your first involvement in the Horizon project came in November 1997; is that correct?

Dr Sarah Graham: Yes.

Ms Hodge: That was when you were appointed as the project head of a special review of benefit payment policy within the Department of Social Security?

Dr Sarah Graham: Yes.

Ms Hodge: Can you please describe the circumstances in which that review had been commissioned?

Dr Sarah Graham: It was, as I think I said in my statement, against growing concerns within the Benefits Agency and therefore the Department of Social Security about the delays and the deliverability of the project, the overrun in time and also the overrun in budget, and the need, therefore, to review where we were with the project.

Ms Hodge: For the benefit of those following your evidence, can you please explain the relationship between the Department of Social Security and the Benefits Agency, as it then was at the time?

Dr Sarah Graham: Very similar perhaps to what we have nowadays, which people will know about between the Department of Health and the NHS, that the Benefits Agency was, as it were, slightly at arm’s length, a freestanding agency set up actually as what we then called a Next Steps agency, so they were operationally responsible for running the operation of the payment of benefits and everything to do with that, but the Department of Social Security held the overall policy responsibility, ministers in charge of the Department had the overall responsibility, particularly, of course, on matters such as overall budgets and expenditure. So I hope that makes that clear in as simple a way as possible.

Ms Hodge: Thank you, it does.

Before being appointed to lead the review you’ve described, had you had any prior experience of working on large IT projects on behalf of the –

Dr Sarah Graham: In the mid-1980s, I had been appointed as the head of corporate affairs, so to speak, for the operational strategy, which was a large programme within the then Department and the Benefits Agency, basically for computerising the payment of benefits and all the systems that underlay it.

So I did, in fact, have some experience of working with procurement, which had been one of my responsibilities. And I don’t know whether it would be interesting to the Inquiry, but I had spent some time in the United States as part of that programme and visiting many of the contractors or potential contractors that we might work with.

But also visiting something called the United States Defence Staff System, based in San Diego, which was not unpleasant, but that was the only system in the world that was as large as our Benefit Payment System, which I think indicates one of the interesting facts here that I think the Department and the Benefits Agency had a long experience of working with contractors, and also had a long experience, for good or ill, with actually computerising benefits. And, in fact, as some people may know, you know, we had some of the oldest computer systems going back to, sort of, huge processing machines based in Newcastle.

So I say that just as giving a bit of the flavour of the long experience, I think, possibly the deepest within government itself, over the long – such a long period, of working with computer systems and also with working with other contractors and consultants to deliver our services.

And in that context, it might be worth saying that one of the things that we learnt early on, that these large global companies, they were never in the room without a lawyer and, you know, this was something that was actually quite new to us in the 1980s, and I’d like to think we learnt a lot from that experience.

But I hope we had a lot also to bring to the table when it came to our discussions with our Post Office colleagues and with government more generally on this kind of issue.

Ms Hodge: Thank you. You mentioned procurement. I don’t believe you had any direct involvement in the procurement of this system; is that correct?

Dr Sarah Graham: No, I didn’t.

Ms Hodge: It’s been suggested by some witnesses to the Inquiry that the Department and the Agency were hostile to the Horizon project from the very outset. Do you consider that to be a fair characterisation of the attitude of the Department and the Agency, at the point at which you became involved in November 1997?

Dr Sarah Graham: I would say concern rather than hostile.

Ms Hodge: In your statement, you explain that the Department and the Agency had concerns in 1997 about the viability of the project. You say those concerns were both technical and practical; is that correct?

Dr Sarah Graham: I think the two are inseparably interlinked because, as it appeared to unfold that some of the problems with the technical side of things were clearly impacting on how it was getting delivered – and I’m sure we’ll come on later – that the premise that I think it’s worth re-stating, that the Benefits Agency and the Department, the premise with which they’d actually embarked on this was that we were going to be moving in the long term to an ACT-based system of payment.

So there was a time factor that was implicit in the whole project about a Benefit Payment Card. In other words, if we didn’t actually get the payment benefit card delivered until, you know, we could have, as it were, already moved to an automatic payment system with the banks, it ceased to be of value to us.

Ms Hodge: Thank you. Can you please explain why, in your view, the Department had reason to doubt the technical viability of the project at the point at which you joined in November 1997?

Dr Sarah Graham: I think that at the point that I started looking at the issue, I’m not sure that the Department or the Benefits Agency were in a position of saying it was not viable. I mean, this would’ve perhaps emerged the longer the discussions went on. I think it was more we had reached a point where it was clearly not – it was very late, it was also over budget, increasingly, and, as you may have seen, I think that, because of the government accounting rules, the chief executive of the Benefits Agency needed a direction in order to continue with the project.

So, in that sense, it was – that was one of the reasons why we actually needed to reach a view with our partners and across Government about the best way forward.

Ms Hodge: You’ve mentioned the ministerial direction in your statement.

Dr Sarah Graham: Yeah.

Ms Hodge: Can you please explain what the purpose of that was and why one had been sought in this particular case?

Dr Sarah Graham: I think I would have to defer to others with more experience to explain the detail of what a ministerial direction under the accounting rules – you know, all the specifics of when it becomes necessary. But in very broad terms, it becomes necessary if it looks as if there are accounting issues that would present – I’m trying to search for the right word – that would present difficulties in a responsible use of taxpayers’ money, and there are clear accounting rules around this and, as I say, I think I would have to defer to others to say exactly what those were and are.

Ms Hodge: Thank you. A little later in your statement you describe ICL Pathway underperforming on the original specification. Can you please explain what you mean by that?

Dr Sarah Graham: I think I might have to look at some – can you cite to me any of the documents that I’ve referred to?

Ms Hodge: Your statement, if we could bring it up, bears the reference WITN03790100, please. It’s at paragraph 7, please.

Dr Sarah Graham: Can you repeat the question?

Ms Hodge: Yes, of course. So we see here you explain:

“I have been asked to explain the problems faced by the cross-departmental Horizon Project Review Group between Spring and Summer 1998. I cannot recall the specifics of the problems during this period but in broad terms, as explained in the referenced papers, there were serious and increasing concerns in DSS and the Benefits Agency that it was running increasingly late, underperforming on the original specification and potentially heading for significant budget overruns.”

My question was what you meant when you said that the project was underperforming on the original specification?

Dr Sarah Graham: I think what I meant there was that they were not, as I recall from the papers – and perhaps I should say here I have been very dependent on the papers that have been delivered as part of this Inquiry on stimulating my memory. But underperforming in the sense that major milestones had been missed, a particular one, as I remember from the papers, and perhaps what had stimulated my appointment, was in November 1997.

I believe there had been problems with – and we may come onto that later – problems around the way this whole project had got off to a start, which the Project Mentors report around the reasons for the delays explains a little bit more. But it was because of these significant delays, and there had been a restructuring of the whole project, I understand, before I got involved, in February 1997, allowing, in a sense, for all parties to regroup and reset exactly the way they were going to move forward. And it was against that backdrop that, even though the requirements had been, as it were, reset, there was still a significant milestone missed in November. That was, I think, what I meant in very simple terms by saying “underperforming”.

Ms Hodge: Thank you.

In terms of the action which was taken to address the concerns you’ve described, you state it was the Department and the Agency who took the lead in raising concerns about the project’s future deliverability; is that correct?

Dr Sarah Graham: My understanding is that both the Post Office, or Post Office Counters Limited, and the Benefits Agency both agreed that ICL Pathway was in breach for missing their November 1997 deadline. However, I think that our interests were not – were different, and perhaps our concerns, as a result of that, were not as great as those of Post Office Counters, because, as I’ve explained earlier, we had a real interest in timing. I think that Post Office Counters had different priorities and concerns and, in simple terms, while we were still paying benefits through them with our order book system, they were still retaining the same level of income.

So to that extent, there perhaps wasn’t quite the same driver, if you like, or sense of urgency about trying to resolve the problems with the Benefit Payment Card.

Ms Hodge: We can see the concerns of the department articulated in a letter to the Prime Minister, dated 6 February 1998. That bears the reference CBO00100005_033. I wonder if that could please be shown. Thank you.

On the second page of that letter, we see the initials “HH”, which we assume denote the then Secretary of State for the Department, Harriet Harman; is that correct?

Dr Sarah Graham: Yes.

Ms Hodge: Do you recall whether this letter was drafted by you in your role as project lead on the review?

Dr Sarah Graham: I’m afraid I do not recall but I would think it highly likely.

Ms Hodge: Thank you. If we could please turn back to the first page, we see the Department’s concerns summarised in the first paragraph there. This is a letter, of course, addressed to the Prime Minister, in which the Secretary of State records:

“I am writing to alert you to problems with a private/public sector project designed to improve the Benefit Payment System and automate the Post Office network. In a nutshell, there is a serious risk that this project will fail to deliver its objectives – or will not do so within a timescale that will make it worthwhile.”

The letter goes on to set out what the original objectives of the project were and to spell out some of the funding consequences and some of the wider policy considerations that were raised by the project.

I wonder if we could please scroll down to the second page. Thank you. We see there at the third paragraph, the letter essentially concludes that:

“Although we [by which I understand the author to mean the Department of Social Security] have a clear view about the best route forward, I am clear that we should at all costs seek to avoid getting focused too closely on individual Departmental interests, and that we should aim to establish an agreed view from the start, avoiding the potentially damaging effects that our quite legitimately differing Departmental views have, when exposed to the public eye.”

Do you consider that that statement of the Department’s position accurately encapsulates your views or the views of the Department at this stage in February 1998?

Dr Sarah Graham: As you know, I’ve only just seen this letter. I wouldn’t be in a position to say one way or another in terms of what the Department was saying about its view on a way forward but the sentiment that we should have an agreed view from the start and that we should work together with all the interests is one I very clearly endorse as being at the heart of our Department’s thinking throughout and, indeed, I think that there are some other exhibits that have actually brought this out.

I think that there was a consistent recognition by us of the need to reach a solution that certainly was agreeable to all the public sector parties and, indeed, also to ICL.

I cannot recall the document now, but I do remember reading one that I wrote which said “What we want to avoid is a Treaty of Versailles situation”, which I think, in our Department, we were trying all the time to find a solution that would work for everybody. And I think I’ve just noted, because I happened to see it, exhibit E6, there was an internal document that I authored as briefing for our Secretary of State, so it was an internal document, not for the public eye, in which, again, I put this point very firmly, paragraph 13.

And I think again in exhibit E14, I haven’t made a note of what that was, but I think I’d say it was a consistent part of our approach.

Ms Hodge: That is to say to achieve a consensus between interested parties on the best way forward?

Dr Sarah Graham: Yes, and I think – again I cannot recall, I’m sorry, which document – but I have read one where I wrote explicitly “We cannot – in order to reach an agreed way forward, each party has to accept it won’t get everything it wants”. I mean, that’s in the nature of finding an agreement. But, on the other hand, each party does need to get something it wants and, as I recall it, there was one particular way forward that was being suggested where the Benefits Agency and DSS would get nothing. So, you know, that was clearly not going to be one where we would be able to accommodate others.

Ms Hodge: My first question to you should have been what the clear view about the best route forward was, but I think you’ve answered that by saying you don’t feel able to articulate –

Dr Sarah Graham: No.

Ms Hodge: – what that view was at that stage in the process. Thank you.

In terms of the wider policy considerations which underpinned the concerns of the DSS, your statement suggests that one of the primary objectives of the Department was to secure the timely and accurate payment of benefits; is that correct?

Dr Sarah Graham: Yes.

Ms Hodge: I think we can see that reflected in your statement, please, at page 4, paragraph 8. Thank you. We see there at the bottom of the first paragraph it reads:

“Paramount, however, in the transition to any new system, was the ability to sustain the reliability of the Benefit Payment Service for recipients, many of whom were among the most vulnerable in our population. Problems with the Benefit Payment Card put these responsibilities at risk.”

You’ve described that as paramount; did you consider it to be the most important of the considerations at play for the Department at this stage?

Dr Sarah Graham: I think it probably is still, in my view, the primary concern that the payment of due benefits to recipients is achieved safely and efficiently, effectively.

Ms Hodge: You’ve referred there to problems with the Benefit Payment Card. What did you understand those problems to be in the spring and the summer of 1998?

Dr Sarah Graham: My memory cannot recall that in detail.

Ms Hodge: You’ve explained in your statement you did not have technical expertise and that you relied upon those within the Agency who did; is that right? We know from documents obtained by the Inquiry that senior figures in the Agency received reports of what were described as lost or incomplete transactions of duplicate payments and cash account errors. Do you recall whether those types of issues or problems were brought to your attention?

Dr Sarah Graham: I do not recall. I have seen the paper or a paper in the documents that were just sent to me, I think, very recently. And I have to say it didn’t, it didn’t ring any bells with me. So I’m not – that isn’t to say that I did not know about them at the time, but certainly I cannot recall.

Ms Hodge: Thank you.

You say at paragraph 11 of your statement that you were well aware from Agency colleagues that there were serious concerns about the ability to develop the Benefit Payment Card as originally designed and specified.

Do you recall who at the Agency articulated those concerns to you?

Dr Sarah Graham: My main contact in the Benefits Agency was George McCorkell, whose name I’m sure you will have seen on some of the documents, who was the lead official.

Ms Hodge: Thank you. It appears that Harriet Harman’s letter to the Prime Minister in early February 1998 prompted the intervention of the then chief secretary to the Treasury, Alistair Darling, who commissioned an interdepartmental working group, known as the Horizon Project Review Group, to address the problems which had beset the programme. Is that consistent with your recollection of events in the early part of 1998?

Dr Sarah Graham: Yes.

Ms Hodge: The group was comprised of senior officials rather than government ministers; is that correct?

Dr Sarah Graham: Yes.

Ms Hodge: You were invited to act as a standing member of the group, in order to represent the interests of the Department of Social Security; is that right?

Dr Sarah Graham: Yes.

Ms Hodge: You’ve explained in your statement that one of the tasks assigned to the group was to carry out a review of the project’s technical viability. What did you understand the term “technical viability” to mean in this context?

Dr Sarah Graham: Ah … I think that what I understood it to mean was a clear investigation of what was involved technically in the Horizon project, including the Benefit Payment Card, and the viability of what was proposed.

Ms Hodge: By “viability”, can you confirm what you mean in the sense – are we talking about something that’s theoretically possible or something that, in actual fact, can and will be delivered?

Dr Sarah Graham: I think you’ve put your finger on one of the difficulties with the project, in that there were aspects that were to do with its technical complexity, and clearly it was a very complex proposal, but its viability would link also with human factors, operational factors. You know, there was more to it than just simply, as you say, a kind of theoretical possibility.

And I don’t know whether we’re going to come on to this, but the actual panel that was asked to look at the technical side of the project certainly made clear that while, in theory, it thought that the Horizon platform, as distinct from anything you might add onto it like the Benefit Payment Card, was technically – I can’t remember the exact word they used, but I think they certainly meant that it was possible, and that – viable, technically viable, they recognised that there were, nonetheless, huge risks around it in terms of its deliverability, which was, you know, a different issue.

Ms Hodge: Thank you. You’ve mentioned the expert panel, you were assigned responsibility for investigating the project technical viability. That was chaired by Adrian Montague; is that correct?

And we know that they ultimately concluded that the project was technically viable; is that consistent with your recollection?

Dr Sarah Graham: My understanding is that the Horizon platform they considered as technically viable, but that, as I say, my – I think if we looked at the report, we’d see that they hedged it around with saying there were, you know, many, many risks in actually delivering it.

Ms Hodge: Yes. We can bring up the report, please, it’s at POL00028094. Thank you. There’s an “Executive Summary” of the panel’s findings at page 3, please. It’s under the heading “Findings” we see recorded:

“The programme is complex, probably the biggest of its kind. Its scale, and particularly the development work required, were underestimated initially. The parties have since increased the resources devoted to the programme, but a range of issues remain to be resolved.

“Our view is that the programme is technically viable. There must be some risk around scalability and robustness because the system has had to be tested at the level of component parts, but we are satisfied these risks are being well managed by Pathway.”

It goes on to state:

“There is good evidence of future proofing at all levels. The basic infrastructure is very robust for the future and, in the main, industry standard products have been used. The system should allow [Post Office Counters Limited] to compete for new business in a variety of markets, including banking and financial services. New applications based on smartcard technology should be relatively straightforward and economic. If online applications are required, they may take longer and require more investment.”

Were the panel’s findings, as summarised there, consistent with the expert advice which you were receiving from colleagues within the Benefits Agency about the reliability of the system that was admittedly still under development at this stage?

Dr Sarah Graham: First, to say I think the Department and the Benefits Agency’s interest was primarily in how the Benefit Payment Card and payment of benefits was affected. So, to that extent, this more general idea about the robustness of Horizon was not within our province, except, as I say, insofar as what would happen for the Benefit Payment Card and the payment of benefits and our policies on moving to ACT.

From what I can see here, I have no reason to disagree with it. My memory is that, in the back part of the report, there is perhaps more explanation of what the risks were around the programme.

Ms Hodge: Yes, indeed, would you like us to refer to that?

Dr Sarah Graham: I’m not sure that I can actually pinpoint exactly –

Ms Hodge: No, I’m sorry, would you like me to take you to those sections now of the report?

Dr Sarah Graham: Well, we could just have a look, yeah.

Ms Hodge: By all means, yes.


Dr Sarah Graham: I think we’re just … think about scalability –

Ms Hodge: So we see at paragraph 25 –

Dr Sarah Graham: Yeah.

Ms Hodge: – the main architectural –

Dr Sarah Graham: And this is – I think one of the key issues for – from the Benefit Payment Card perspective, as we may come on to, was the whole approach to acceptance testing, and I think that you may have seen in subsequent papers that there is – and we knew from bitter experience with a project called NIRS2, that there is a great difference between what they called model office testing and live trialling. And, as you say, scalability, all these things would have caused, I suspect, you know, some level of doubt and it’s a risk that is quite difficult to assess in this sort of rather theoretical environment.

Ms Hodge: Thank you.

You’ve explained in your statement that, in terms of the significance of the panel’s findings on this important issue, their conclusions essentially underpinned the advice which was subsequently communicated to ministers by the review group about the future options for the project; is that correct?

Dr Sarah Graham: I’m sorry, could you repeat that?

Ms Hodge: Sorry, the formulation was perhaps unfortunate. In your statement, you suggest that the conclusions of the panel as to the technical viability of the project very much underpinned the advice that was subsequently given to ministers by the review group, concerning the future options for the project; is that fair?

Dr Sarah Graham: Yes.

Ms Hodge: We can see evidence of that particular point set out at paragraph 17 of your statement, please, on page 7. Thank you. I think it’s on the following page, please. Thank you. Thank you.

So we see there the first of these, which was the question as to the technical viability of the project:

“… was dealt with, and taken fully into account, by the report it had commissioned from the specially constituted Independent Panel. This report formed the basis on which consideration of the possible options, including cancellation, could stand. Thus, Option 1 assumes the Panel’s view that, although there were risks endemic in such a large and complex programme, the basic platform was potentially robust albeit only achievable on a much longer timescale (some 3 years later than originally planned) and subject to significant ratcheting up in many areas, primarily in the quality of management and control within ICL Pathway …”

It goes on to say:

“Having accepted that position, other issues came into play, specifically the costs of cancellation and alternative options, as per the Group’s remit.”

Did you consider at the time that the review group was right to proceed on the assumption that the project could be delivered successfully by ICL Pathway?

Dr Sarah Graham: As I recall it, yes, in the sense that, as stated here, that, in theory, it was potentially robust but there were a number of issues around it that also needed to be resolved, both in terms of the implications of timing and quality of management and control within Pathway, to mention just a couple. So I think that would be a fair assessment of what I – or what the Department felt at the time.

Ms Hodge: You have explained in your statement that the review group explored three possible options for the future of the project. Put very simply, these were, firstly, continuing with the project in its then guise, to a very great extent; the second being restructuring of the project to remove the Benefit Payment Card; and, finally, cancellation of the project.

You’ve described cancellation in your statement as the logical course. Can you please explain why you regarded it at the time as the logical course?

Dr Sarah Graham: Well, from memory, the cancellation – from our perspective, the cancellation of the project – it wasn’t working, it hadn’t – it wasn’t being delivered to time. ICL Pathway were in breach and I believe it was not impossible to conceive of other ways in which the Post Office, ourselves, government, could achieve our objectives. I think, you know, we shouldn’t altogether forget that there were some other objectives apart from strictly the benefit – payment of benefits.

There was also the Post Office’s concern to grow its business, which was a longer term objective, and to become more commercial. And also there were Government objectives about modernising government, making it more efficient, also about social exclusion.

There were, you know, a number of these sort of issues that were all sitting there and waiting, in a way, to be taken forward. And it is possible that, you know, if cancellation had been considered a viable option, we could all have regrouped, as it were, and started again.

Ms Hodge: We know that the majority of the group recommended continuing with the project, so the first of those three options that we’ve mentioned. But that was not a decision which you felt able to endorse; is that right?

Dr Sarah Graham: Yes.

Ms Hodge: If we could please scroll down to page 8 of the witness’s statement, please, we can see that you addressed this point at paragraph 18. You say:

“Looking again at the Group recommendation to pursue Option 1, the decision seems clearly weighted to the interests of the Post Office and ICL in a way that still seems difficult to understand and could not be readily accepted by the [Department and the Benefits Agency].”

You go on to say that:

“It appears that the majority of Group members deemed the risks to the Post Office and its future, the possible risk of litigation, the potential impact on inward investment and reputational risk to Government and its PFI policy if the project failed, outweighed the risks of forging forward with the project, despite the evidence of performance to date, and even with so many uncertainties as acknowledged by the Panel and the even greater impact if it failed anyway.”

Were you concerned at the time that, when assessing the ability of Pathway successfully to deliver the system in future, insufficient weight was being placed upon its actual performance up until that point?

Dr Sarah Graham: Can you repeat the question?

Ms Hodge: Were you concerned at the time that when the group was assessing the ability of Pathway successfully to deliver the system in the future, it was placing insufficient weight upon its actual performance to date?

Dr Sarah Graham: Yes.

Ms Hodge: If you were concerned that the system could not be delivered successfully, as it was originally conceived, why did you, on behalf of the Department, endorse the second of the two options?

Dr Sarah Graham: Well, I think that, as – as we were discussing earlier, it was important to find a way forward for all to agree, and it certainly seemed that there was scope – I haven’t got option 2 in front of me now, so I’m sort of speaking a little bit –

Ms Hodge: That’s the restructuring of the project to remove the Benefit Payment Card.

Dr Sarah Graham: Exactly. Well, in a very simple way, removing the Benefit Payment Card very much simplified the project, so it certainly increased its ability to – would significantly increase ICL Pathway’s ability to be able to deliver on the project. So I think that’s the first point.

And I think the other point, which I cannot now recall whether it was at that stage part of option 2, but to remove the Benefits Agency out of the contract would actually have made things very much simpler in terms of the relationship of managing the project if it was between two parties, in perhaps a more conventional manner.

Ms Hodge: In view of the concerns that your colleagues in the agency had expressed about the reliability of the system, was there not a risk that in endorsing option 2, the Department would be lumbering Post Office Counters with a flawed system?

Dr Sarah Graham: We were still going to be a customer of the Post Office, so I don’t think that we were viewing it as a negative option, in the sense, as I said, that there was a genuine belief that by desimplify – decomplicating the project and by taking the Benefit Payment Card away, it should have become a much simpler and more straightforward project to deliver. Even taking account of issues like past performance, there was actually a better opportunity for a positive way forward.

Ms Hodge: From the perspective of your Department, did endorsement of option 2 offer the path of least resistance in terms of it offering an option which was at least acceptable to some of the contracting parties?

Dr Sarah Graham: It seemed, I think I said at the outset, that when parties disagree it’s often difficult to find a solution that is perfect for everyone, but this certainly looked, at the time, as the best way forward, taking all the complex considerations into account.

Ms Hodge: We know that efforts continued to be made in the autumn of 1998 to find a workable solution to the problems which had beset the project. Negotiations with ICL Pathway as to the contractual basis on which the project might proceed were initially conducted under the auspices of Graham Corbett; is that correct?

Dr Sarah Graham: Yes.

Ms Hodge: When those negotiations failed to come to fruition, the issue was remitted to another working group; is that right?

Dr Sarah Graham: I cannot recall.

Ms Hodge: It appears from the papers we have that a further working group was brought together, whose composition largely mirrored that of the original review group, but also compromised representatives of the Benefits Agency and Post Office Counters Limited; do you recall that?

Dr Sarah Graham: Yes, I have to say that I had largely viewed it in the way you’ve just described, that it was, in fact, the earlier group with the helpful addition of people from the Benefits Agency and Post Office.

Ms Hodge: It appears from the documents we have that you, in fact, suggested that it would be sensible to include Post Office Counters Limited within the group; do you recall making that suggestion?

Dr Sarah Graham: No, but it sounds like a good one.

Ms Hodge: You were sufficiently concerned about the direction of interdepartmental discussions in mid-November 1998 that you sent a paper to your colleagues in the Treasury setting out the nature and cause of your concerns; is that right?

Dr Sarah Graham: Can you refer me to the paper?

Ms Hodge: Of course. It bears the reference POL00028635. This first page is a fax cover sheet.

Dr Sarah Graham: Yeah.

Ms Hodge: We can see it’s addressed to the Horizon Working Group members, who are listed on the left-hand side. They include various officials in Her Majesty’s Treasury, David Sibbick in the Department of Trade and Industry, Jeremy Crump in the Cabinet Office central IT unit, Geoff Mulgan at Number 10, Jonathan Evans and Paul Rich of the Post Office and George McCorkell of the Benefits Agency. It also includes Hamish Sandison of Bird & Bird, can you confirm what role he played at this stage, please?

Dr Sarah Graham: Hamish Sandison was the joint programme lawyer for the Benefits Agency and Post Office Counters advising on contractual arrangements.

Ms Hodge: Thank you. We can see the fax is dated 13 November, and in the lower section it’s from you, Sarah Graham, at the DSS.

If we scroll down to the second page, please, we can see a covering letter addressed to Sarah Mullen and addressed to various members of the Horizon Working Group. In terms of the context of this paper, that’s set out at paragraph 1, in that it provides:

“In preparation for the Inter-Ministerial meeting on Tuesday, and as agreed at the last Working Group meeting, it is important that we do not concentrate on an analysis of the ICL proposals at the expense of giving ministers the opportunity to consider whether they still wish to continue with an option around the project ‘as is’, or whether now is the time to pull the plug and open discussions with I’m ICL either around an alternative option or a negotiated termination.”

You explain that you’ve attached:

“… a note of some of the main issues that [you] believe the Working Group should put to Ministers, which [you say] do not naturally fall out of the evaluation process we have been following.”

Then at paragraph 3, please:

“Turning to the ICL proposals themselves, having had the benefit of attending the presentation they gave yesterday, I am quite clear that the proposals taken together do not present a sufficiently significant move on ICL’s point to meet Ministers’ original criterion for the discussions – to find a commercial ‘deal’ acceptable to Government. The analysis that DTI/POCL has put to you completely ignores the transfer of risk that underlies the ICL proposals – Government/public sector parties being asked to underwrite not only the new loans but the ones that already exist; guaranteed payment to ICL, with scant regard to the level of performance; significant price increases; payment in advance; acceptance of the project before it is fully trialled in any systematic form; by any token this is a complete re-write of the contract which was originally let; certainly changes the original PFI concept of transferring some risk to the private sector; re-draws the project in terms of the contractual basis, the specification, the funding – now put at £600 million over the life of the project for ICL of which £480 million is to be underwritten by the public sector sponsors. In practical terms, to close the deal as David Sibbick says, Government needs to commit a further £120 million and more – for the privilege of allowing ICL to continue with the project, and possibly glean some future benefit from ‘the golden cloud’ which hovers over the partnership agreements with POCL.”

If we scroll down, please, to page 4, we can see a copy of the paper which you enclosed with this letter. Thank you. It’s described as an “aide memoire” of issues that may have escaped the formal evaluation process. Do you recall producing this document at the time?

Dr Sarah Graham: It’s nearly 25 years ago, so I don’t think I would be honest if I said that I could recall it in detail. Certainly re-reading it, I remember broadly the situation.

Ms Hodge: Thank you.

The first of the six headings in this paper is entitled “The risks of continuing with the project”. This is the area on which I would like to focus our attention, please.

The first bullet point bears the heading:

“Why should ICL performance improve dramatically in the future over the past?”

You state there:

“Apart from the well documented and continuing delays, ICL have dragged their feet every step of the way, always looking to do less rather than more, [for example] constant arguments about the security requirements for the [Benefit Payment Card] have only recently been resolved, although these were central to the [Department’s] business and policy objectives for undertaking the project at all. There is no evidence that ICL is making extra efforts to keep to committed milestones since they were placed in breach of contract by both parties last November, [for example] the October 1998 milestone for the software required for delayed operational trial (11 months late) was not met. The whole tenor of the discussions around the negotiations with Graham Corbett was to make life much easier for ICL than … the current contract: easing requirements, cutting corners, etc; and this is further reflected in spades in the latest (9 November) proposals from ICL. This cannot bode well for the future. Either the project is in the end going to cost much more than is envisaged, to get the quality and timely product we need; or, just as likely, it will not be delivered on time or in totality; or most likely of all, a mixture of both.”

We can see you here expressing yourself in what you’ve described as forthright terms. Why did you consider it necessary to do so at this stage in November 1998?

Dr Sarah Graham: As I’ve just said, I think it’s quite difficult to recall in a way that would be helpful to this Inquiry, you know, the exact sequence of events. But reading that, I would judge that I clearly felt that the way the discussions were going was or were disregarding the key factors that I had put here in this document.

Ms Hodge: Thank you.

Your aides memoire contained reference to ICL Pathway’s proposals to ease the requirements imposed upon it by the terms of the original contract. We know that one aspect of their proposals related to the criteria on which the system would be deemed to be contractually acceptable; do you recall that?

Dr Sarah Graham: I recall it in part through reading some of these documents, but it would only be through that means. But what does come up again and again in looking through these documents is ICL Pathway’s repeated attempts to soften the acceptance criteria and, as I think I said earlier, to base acceptance on what was achieved in what was called the model office or partial trials, and not on the acceptance criteria that, if I recall rightly, in the Project Mentors report – which we may allude to later – that was commissioned at an earlier stage by the Benefits Agency and the Post Office, about the reasons for the delays, they had made quite clear that ICL were not actually following the normal kind of process that would be expected in a project of this type.

Ms Hodge: You’ve referred just now to two aspects of the proposals, one being a relaxation of the acceptance criteria, and the second being the acceptance of the system at the end of model office testing rather than a live operational trial. Those are the two that stand out in your memory; is that correct?

Dr Sarah Graham: From memory, but I think there were, you know, various gradations in between. I would – you know, I would defer to those who actually were involved in this process to be able to describe more reliably what was involved.

Ms Hodge: What, if anything, did you deduce at the time from these proposals about ICL Pathway’s confidence in the robustness of its own technical solution?

Dr Sarah Graham: Well, I said at the beginning I am not an expert in this field at all, but I think, just in a common sense way, something didn’t seem right in this constant, as I was understanding it, sort of eating away, trying to make things easier. And also I think remembering that these criteria related to the way that payments would then be made to ICL. So there is obviously that other aspect that, you know, it’s not just making sure that the system works, which was obviously our primary interest, but, from an ICL Pathway point of view, there was a real concern that they needed to tie in or would like to tie in whatever the acceptance criteria were to, if you like, ease the criteria for payment to them.

Ms Hodge: From what you said, you therefore think that there was a strong financial aspect to the proposals; is that a fair inference –

Dr Sarah Graham: Yes.

Ms Hodge: – from your evidence?

Dr Sarah Graham: Yes. But that’s understandable, they’re a business, so that’s fair.

Ms Hodge: You refer in your statement to an independent review of Horizon which was jointly commissioned by the sponsors from Project Mentors Limited, and you’ve mentioned that in your evidence this afternoon. Can you please explain the reasons for Project Mentors’ original appointment by Post Office Counters and the Benefits Agency?

Dr Sarah Graham: They were – my understanding is that they were appointed in order to establish, from our point of view, where the blame lay for the severe delays in delivering and meeting the deadlines and milestones. I mean, this against a backdrop of the contract that we had jointly with ICL and, as you might expect, ICL were basically saying it was our fault that they hadn’t been able to deliver what they were supposed to be delivering.

So it was in, you know, our strong interest to make sure that we had some independent view of what had actually been going on, and the report stated very clearly that the assertions by ICL – that it was basically our fault for not doing or not giving them the data they needed and related issues – that that was not the case and that the delays should be laid unequivocally at ICL Pathway’s door.

Ms Hodge: We know that Project Mentors produced three separate reports, the first two of which were concerned with the reasons underpinning the delays to the programme, as you have outlined.

I would like to ask you about the third report which was produced in December 1998. This bears the reference POL00031114, please. Thank you.

We can see this is simply the fax cover sheet confirming that the report has been sent by Hamish Sandison of Bird & Bird to BA/POCL, it’s for the attention of George McCorkell, to whom you’ve referred earlier in your evidence, and also Paul Rich, Pat Kelsey and Andrew Davies, who was also the director of Project Mentors. Do you recall whether or not you were shown a copy of this report at the time it was produced in December 1998?

Dr Sarah Graham: No, I don’t. I mean, I don’t recall.

Ms Hodge: At page 2 of this document, thank you, we can see a memorandum from Hamish Sandison, the joint programme lawyer, as you’ve explained, introducing the report. It reads at paragraph 1:

“Further to my Memorandum dated December 8th, I attach the full report of the work by Andrew Davies and his team on requirements analysis. This fleshes out the brief update from Andrew which I sent you with my December 8th Memorandum. As you will see, all three of Andrew’s team are (I quote from Andrew’s letter to me) ‘deeply concerned that their findings show a serious problem with the way in which ICL Pathway have developed the system. The impact of this is likely to be that there will be failures to meet essential user requirements, causing the need for extensive re-work before the system can be accepted and, potentially, operational problems if the system is rolled out.”

The memorandum is followed by a covering letter from Professor Andrew Davies, the director of Project Mentors, in which he summarises at the key conclusions of the report – I wonder if we could turn to page 3, please. This letter addressed to Hamish Sandison reads:

“We have now completed a provisional version of our position paper on requirements analysis, a copy of which I attach. We are of the opinion that the findings of this paper give serious concern that the Payment Card System has been developed in a manner that creates a breach of the contract relating to the requirement in clause 702 of the Authorities Agreement to work to ‘good industry practice’ and that the impact of the breach is likely to be that the system will not be fit for purpose unless extensive re-work is carried out before implementation, causing further delay and additional investment by Pathway and the Authorities.”

The letter goes on to explain why Project Mentors considered ICL Pathway to be in breach of contracts for failing to follow good industry practice.

In the following paragraph we see Andrew Davies set out a summary of the conclusions from chapter 2 of the paper, in which it says:

“We have performed a requirements analysis for BPS [the Benefit Payment Service], which is predominantly a BA system element. From our analysis we conclude that Pathway have made no attempt to undertake requirements analysis in accordance with normal industry practice. This is despite their having access to the SSR [which we understand is the statement of service requirements] and subsequent requirements since April 1996. Much of this work could, and should, have been done during the demonstrator [phase].”

On the following page, please, Professor Davies sets out what he considered to be the consequences of ICL Pathway’s apparent failure to perform that detailed requirements analysis. We can see that at the top of page 4, where it reads:

“Our experience of systems where requirements have not been analysed satisfactorily is that the system fails to meet the users’ needs. An effective acceptance test will identify many such failings, necessitating considerable rework. The result is a significant extension of the time and cost required to complete the system and roll it out. The alternative is to allow unacceptable processing in the operational environment, with unpredictable and potentially damaging results.

“In our opinion, the failure to satisfactorily analyse the requirements for the Benefit Payments System make it unlikely that the users’ needs will be met by the current Pathway system.”

It goes on to say:

“We do not believe, from our understanding of other elements of the complete Payment Card System, that these other elements have been analysed using better techniques than for the Benefits Payment System, so there is a concern that user needs for these elements will also not be met by the current Pathway system.”

You have explained you don’t recall reading a copy of this report at the time. Do you recall whether its findings were brought to your attention by George McCorkell or others at the Benefits Agency?

Dr Sarah Graham: No, I don’t recall these particular findings. The general finding does not surprise me, but I also am not – I don’t know whether I alluded to any of this in any of the submissions that I wrote. I feel that if I had known about it, I feel I would have included it.

Ms Hodge: It has been suggested by at least one witness to the Inquiry that the production of this report reflected a concerted strategy by the department and the Benefits Agency to justify its withdrawal from the programme. Do you consider there to be any substance to that allegation?

Dr Sarah Graham: No. I think our concern was to establish, as I explained earlier, what our position was in the face of ICL claims, I think again in the pack there are letters from the vice chairman, I believe, and chairman of Fujitsu, and others involved at a very senior level in ICL, that make it clear that they were trying to place the blame of their delays on the Benefits Agency.

So I think our concern, and I would think the Post Office’s concern too, is to actually identify where the problems with the development of the project actually lay.

Ms Hodge: Thank you.

Sir, this may be a convenient time to stop. I have a limited number of additional questions for this witness, and so if we could break for 10 to 15 minutes now, and I still think we’d be on course to conclude this afternoon.

Sir Wyn Williams: That’s fine. Are there questions from legal representatives or is it just you, Ms Hodge?

Ms Hodge: There are a small number of questions, I believe, from recognised legal representatives.

Sir Wyn Williams: All right. Let’s take 15 minutes, that’s fine.

Ms Hodge: Thank you, sir.

(3.18 pm)

(A short break)

(3.35 pm)

Ms Hodge: Hello, sir, can you hear and see me?

Sir Wyn Williams: Yes, I can, and I was having trouble unmuting myself, hence the delay.

Ms Hodge: Thank you. We can see you and hear you.

Thank you, Dr Graham. In early December 1998 there came an intervention from Fujitsu Japan in the ongoing negotiations over the future of the Horizon project. Do you recall that?

Dr Sarah Graham: Yes.

Ms Hodge: I believe you have been shown a copy of a report produced by the then British Ambassador to Japan, Sir David Wright, in which he records a meeting he held with Mr Naruto, the vice chairman of Fujitsu and chairman of ICL, on 4 December 1998; is that correct?

Dr Sarah Graham: Yes.

Ms Hodge: We have a copy of that report, please, at BEIS0000336 – thank you, Frankie.

We can see at the top of the page to whom the report was intended to be transmitted. It records “FCO to pass to DSS for PS/Secretary of State”. Do you recall reading this report at the time it was produced?

Dr Sarah Graham: No, but I don’t recall seeing it at the time. But I do recall and see from the papers that I was aware of the approach.

Ms Hodge: Thank you. We find a detailed summary of the meeting a little further down the page, starting at paragraph 2, please. It reads:

“Naruto, Vice Chairman of Fujitsu and Chairman of ICL, called on me today to present me with a letter outlining the serious financial difficulties surrounding Project Horizon and the problems for ICL/Fujitsu. Copy of letter by fax.”

I believe you have been shown a copy of that letter, and indeed you were shown a copy of that letter at the time; is that consistent with your recollection?

Dr Sarah Graham: My recollection.

Ms Hodge: That letter bears the reference BEIS0000337, but it need not be shown at this stage, thank you.

In terms of what was discussed at that meeting, we see at paragraph 3, and I refer you to this because it’s quite a helpful summary of Fujitsu’s position I think a little more succinctly than in the letter:

“Mr Naruto stressed the difficult and serious crisis Project Horizon faced …”

The first point being that the:

“Cost of Project had increased from [£185 million] to [£600 million]. To date [ICL Pathway], supported by Fujitsu, had spent over [£200 million] on the project. ICL and Fujitsu would have to raise the remaining funds through bank loans. Due to delays in setting up the project, ICL risked losing [£500 million] by the year 2000. Loss of this scale against an outlay of [£600 million] was unsustainable.

“[Mr] Naruto and Fujitsu were worried that [Her Majesty’s Government] did not understanding fully understand the seriousness of the situation. From the very outset, the Project had not been given the attention it deserved. Fujitsu were particularly frustrated that the Benefits Agency … had failed to provide ICL with the necessary data to implement Project Horizon. They believed [the Agency] were now dragging their feet over this and appeared to want to stop the project altogether since they wish to switch the delivery system from the Post Office … to the banking system.”

Pausing there, do you consider that was a fair characterisation of the Agency’s position at this stage in early December 1998?

Dr Sarah Graham: No, and as we’ve just seen from, I think, the documents we were discussing before, the Project Mentors report, that was exactly our understanding of where Fujitsu and ICL were coming from, to throw, as it were, the blame on the Benefits Agency.

Ms Hodge: Sir David’s report goes to read:

“Fujitsu and ICL believed that the project was crucial to the modernisation and future health of [Post Office Counters Limited], they could not understand why the [Benefits Agency] were not making more effort to resolve current problems.

“Attention in Japan to PFI had led to 2 seminars organised by the LDP, portraying Project Horizon in the UK as a model for Japan. Naruto feared for Fujitsu’s domestic reputation if the Project failed.

“[Mr] Naruto repeatedly stressed that failure of the Project will have serious repercussions for Fujitsu’s international standing, lead to major internal difficulties within Fujitsu and the collapse of ICL.”

We can see a little further down in the report the Ambassador records his conclusions – thank you – in relation both to the meeting he’d had with Mr Naruto and the letter, a copy of which was shown to you.

He recorded:

“The contents of the letter and the tone of Mr Naruto’s approach make it quite clear that we have a major and potentially damaging problem on our hands. I do not (not) think he was simply trying to make our flesh creep, by warning of the threat to ICL’s future viability. Fujitsu and Naruto in particular, have worked for 18 years first to prop up and then to put ICL on a healthy footing. Naruto certainly meant what he said when he warned of this now being under threat.”

The final paragraph reads:

“finally, whatever the implications for plans for social security benefit delivery (on which it is not for me to comment), any threat to ICL’s continued viability would have profound implications for jobs in the UK and for bilateral ties. Given Naruto’s points at para 5 above, we have to expect that Fujitsu and ICL would publicise their criticisms of the Project’s management. That would be damaging to the hitherto benign and mutually supportive style of the relationship between [Her Majesty’s Government] and Japanese companies invested in Britain. The waves created would be damaging politically at home and to the UK’s position of strength here vis-à-vis our European competitors. [‘This’ probably] is already being weakened by perceptions of distancing from the centre of Europe over the single currency. We can do without more trouble.”

These conclusions, I think, largely speak for themselves. What I would like to ask you is what effect, if any, you consider this intervention by Fujitsu Japan had upon the future course of the public sector negotiations over the future of the Horizon project?

Dr Sarah Graham: As we know, I’m very reliant on the papers that we have seen to recall the detail but, in general terms, I don’t think the letter told us anything that we weren’t expecting to hear anyway from Fujitsu and ICL, and elsewhere in the papers it is apparent that there was also some briefing of the specialist press, so I think we were already geared up, and I think the earlier papers show we were aware of the inward investment aspect of whatever decisions were taken.

Ms Hodge: Do you consider that concerns about Japanese inward investment and job losses in the UK caused ministers to lose sight of the technical risks inherent in pursuing with the Horizon project?

Dr Sarah Graham: I think it’s in the nature of a decision of this sort that there are a number – I mean, that’s the essence in a way of what government does, is actually trying to make difficult decisions where there are many aspects to that decision. It is right that ministers should certainly be aware of these possible effects.

I think that Naruto’s letter probably, as you would expect, makes the point extremely strongly as it is in their interests to do. But, as I have said in other ways, I think it’s right that ministers think about this alongside all the other aspects that they have to take into account. But, coming back to the technical aspects of, you know, whether this project was going to work or not, the whole reason the issue was on the table was because it wasn’t actually working way back in 1997, and the Department and the Benefits Agency were concerned about it, which is, you know, where Harriet Harman’s letter started and everything flowed from that.

Ms Hodge: Would it be fair to say that, between December 1998 and early March 1999, the initiative for moving forward with the public sector negotiations rested largely with Her Majesty’s Treasury and the Cabinet Office, as opposed to the Department for Social Security and Post Office Counters on the other hand?

Dr Sarah Graham: I think they were certainly in the driving seat and were seen as being able to play the role of honest broker. It is manifest that the Department of Social Security, DTI, Benefits Agency, POCL, you know, we all had skin in the game, and the Treasury and the Cabinet Office were well placed to represent the interests of government overall in taking forward those discussions. But, as I think we’ve seen from the papers, I don’t think that that meant that either the Department – the departments concerned or the agencies concerned and the Post Office were actually left out of, if you like, informing what formed the basis of those – the basis for the discussions, if not actually being party to the negotiations themselves.

Ms Hodge: You also remained involved in overseeing the programme from the perspective of the Department; is that correct, in that you were kept informed of developments which were relevant to –

Dr Sarah Graham: Yes.

Ms Hodge: – the negotiations?

At paragraph 22 of your statement, you say that ministers were being kept closely in touch with all the issues, including those aspects of the technical development that were affecting the project delays, and the various options and proposals being put forward by the different parties.

We can see an illustration of that in April 1999 in a document which bears the reference DWP00000019.

Thank you, Frankie.

This is a copy of a submission which you sent to the then Secretary of State for the Department of Social Security, Alistair Darling. This cover sheet is dated 19 April but if we turn to the following page, please, we can see it’s dated 15 April 1999 from you to the Secretary of State. Do you have any recollection of the detail of this document?

Dr Sarah Graham: I can recollect the very broad thrust of it, but in terms of the detail, only what I’ve managed to read very recently.

Ms Hodge: Thank you.

I think it’s fair to say the submission was primarily concerned with the merits of the options that were under consideration by ministers in the spring of 1999. It did, however, contain a brief update on the progress of the programme which addressed the recent results of testing and the agency’s view of the readiness of the system to enter live trial; is that correct, do you recall?

Dr Sarah Graham: I don’t recall, no.

Ms Hodge: We can see that update, please, if we turn to page 12. This is both referenced in your submission and appended to it and, therefore, presumably was written by you at the time. Do you think that’s a fair conclusion to draw?

Dr Sarah Graham: I’m sure that whatever is set down there is what I believed to be accurate at the time.

Ms Hodge: Thank you. Under the heading “Testing”, it reads at paragraph 3:

“Following technical testing of the latest ICL Software New Release 2 (or NR2) four separate Model Office and end-to-end tests have been undertaken. Each of these tests have taken approximately one month to complete. At the end of each run all significant incidents were corrected and proved through ‘target’ testing. In theory the next model office test should have produced a relatively clean run. However, in practice, each of the subsequent Model Office tests has raised as many new incidents as generated through the previous runs.”

It goes on to say:

“Initial test runs of the software should have been completed by mid-December 1998, but because of the above problems testing was halted for two months whilst ICL took steps to put right large numbers of major faults. This was overseen by POCL.

“As we entered the formal and what should have been the final Modern Office run in Feb/March we made it known to the Horizon team our considerable concerns about the creation of new incidents and gave a view that it might be necessary to have an additional run of Model Office. In the event a further 200+ new faults were identified. Some of these were critical and would directly affect the correct or timeous payment of 1% of benefit payments in a Live Environment.

“Further targeting testing has taken place to fix all major faults identified but to date we have not seen a clean run of Model Office. Our definition of a clean run has been set at no incidents which would provide incorrect or delayed payments and only a modest number of background system problems.

“[Post Office Counters] have rejected that view arguing that the targeted tests have dealt with all known faults, further tests will be costly and will delay the start of the live trial and National Rollout.

“The [Benefits Agency] view is that only with a further run of testing of the end-to-end system will give the level of assuring needed that no major new faults will be uncovered because this could:

“put benefit payments to 60,000 Child Benefit customers at risk during the Live Trial;

“put at risk the accurate payment of over £1 [million] per week to those customers during the Trial Period;

“puts at risk the successful completion of the Live Trial; or

“create a situation in which we had to terminate the Project because of failures of the software during the Live Trial that could have been identified earlier in testing.”

This section concludes:

“The differences of view between POCL and BA remain with further discussions taking place to try to reconcile the two views. In the meantime, rather than hold up the Programme, the [Benefits Agency] have agreed not to stand in the way of preparations for the Live Trial.”

You go on then to explain the status of the live trial, confirming that the BA had been unable to approve proceeding to live trial as a result of the current status of testing.

It’s been suggested that the Agency’s refusal to enter live trial simply reflected a reluctance to commit to further financial investment in the programme at a time when the cancellation of the Benefit Payment Card was in contemplation. Do you think that’s a fair characterisation of the position that was adopted by the Agency at this stage in April 1999?

Dr Sarah Graham: No. I think it would be fair to say we were very aware, as we had been all along, about the fact that the longer we didn’t go on making a decision one way or another, or choose between any of the options, the more money was being spent, for example, not on things like developing training and, you know, issues that were related to the wider implementation of the project. So we were well aware of that.

But I think coming back, just looking at all this stuff about the model office trials and the problems that were emerging, I just come back to the earlier point I made at the beginning that I think it would be fair to give the Benefits Agency the credit that they were very experienced, for good reasons and bad, in what could go wrong in the way a project was developed and that it was really important to get the testing right. And I think that is the concern that shines through for me in what we see set down here.

Ms Hodge: So far as you were aware then, were the concerns of the Agency about the system’s fitness to enter live trial genuine concerns?

Dr Sarah Graham: Yes.

Ms Hodge: Do you know to what extent – whilst we see that you are raising these concerns with the Secretary of State for your Department, do you know to what extent these concerns were shared with other ministers in the Department of Trade and Industry, for example, or Her Majesty’s Treasury?

Dr Sarah Graham: No. On the whole, I was not party to – as you would expect, to internal briefings for ministers of other departments. So, although we, at official level, might speak to each other about these issues, we wouldn’t necessarily see what had been sent to each others’ ministers.

Ms Hodge: Thank you. The Inquiry has obtained from the National Archives a copy of a briefing which appears to have been sent by Her Majesty’s Treasury to the Cabinet Office on 22 April 1999. I believe you have been shown a copy of that document, it bears the reference CBO00100002_025.

Thank you, Frankie.

The broader context of this briefing, it appears from the documents we have, was a meeting of the board of Fujitsu in which a decision was to be taken about the future funding of ICL Pathway and the project.

We can see there at the top the briefing contains proposed lines to take in the event that Fujitsu or ICL Pathway decide unilaterally to withdraw.

In close, at the end of this briefing is a document entitled “ICL Pathway: list of failures”. Sorry, there is a document entitled “ICL Pathway: list of failures” at the end of this briefing. I wonder if we could please turn to page 8.

This reads:

“Independent reviews of the Horizon project by external IT experts have all concluded (most recently this week) that ICL Pathway have failed and are failing to meet good industry practice in taking this project forward, both in their software development work and in their management of the process.”

Now stepping back, that seems to reflect some of the substance of what we saw in the Project Mentors report; would you agree with that?

Dr Sarah Graham: Yes.

Ms Hodge: And would tend to suggest that the findings of that report, perhaps at a high level, had been brought to the attention of officials within Her Majesty’s Treasury?

Dr Sarah Graham: I can’t answer that.

Ms Hodge: It goes on to state:

“To date, in the development stages of the project:

“all planned release dates have been missed – including the key contractual milestone for completion of the operational trial for which ICL Pathway were placed in breach in November 1997

“on current working plans, updated as recently as September 1998, the first milestone thereafter – Model Office Testing – was delayed by 2 months

“every release has been subject to reductions in the originally planned functionality.

“and even when each release has gone live, there have been faults and problems which have resulted in the need for Pathway to reimburse DSS.

“in the current trials the known problems have risen from 46 in November 1998 to 139 at the end of March 1999; and currently 146 have not been resolved

“nearly 16 million people should by now be paid by the Benefit Payment Card. In fact only 30,000+ people are currently being paid by the Benefit Payment Card – for one benefit only

“rollout of the system to 19,000 post offices should have been completed at the end of 1998. But only limited functionality is available currently in 204 post offices

“delays to the programme have already cost the Government over £200 million in savings they would otherwise have expected to make.”

It’s been suggested by one witness that this document was authored by the Department of Social Security. Are you able to shed any light on that suggestion?

Dr Sarah Graham: Not directly, but certainly the information that is in this document seems to contain information that we have discussed and presumably was made available to the Treasury if they hadn’t seen it already in the course of all the discussions.

Ms Hodge: Thank you.

Finally, Dr Graham, whilst you were, of course, not responsible for the decision to withdraw the Department from the project, ultimately leading to the cancellation of the Benefit Payment Card, you were the leading official involved in the public sector negotiations on behalf of the DSS. I would like you please to confirm what do you consider to be the principal reasons why the Department decided to withdraw from the project in May 1999?

Dr Sarah Graham: As I think we’ve been discussing in the course of this questioning, the main reason was that the Benefit Payment Card had always been conceived as a stepping stone to achieving the automated payment of benefits through bank accounts which we wanted to introduce, partly in order to make it safer.

Fraud with the existing, then, payment method through order books was an easy win, if you like, and the Benefit Payment Card, the longer it was getting delayed, the longer in a way we were not being able to realise those savings to the taxpayer, dare I say, and nor were we able to progress to a better way of paying benefits which had wider benefits for people through trying to encourage people who didn’t have bank accounts to have them.

And it’s worth bearing in mind that, actually, in fact 80 per cent, I believe from memory, of our benefit recipients already had bank accounts, they simply weren’t using them, and the comparative costs which are laid out, I think, in one of the papers here, of payment by a bank – through a bank or payment through the Post Office was actually very high for the taxpayer, the difference.

So that was our long term and agreed government policy, so the reason for cancelling the Benefit Payment Card was because it basically was not delivering what it had set out or had been designed to do and nor was it doing it on time and, as we’ve discussed today, it seemed in doubt whether it would deliver at all.

So I hope that sums up why we withdrew.

Ms Hodge: Thank you very much, Dr Graham, for answering my questions. I think there are a small number of questions from representatives of the core participants.

Questioned by Mr Stein

Mr Stein: Good afternoon, Dr Graham. I represent a large number of subpostmasters, mistresses and managers.

Can I just direct the questions that I’ve got, very few, to a particular topic.

First of all, what did you know during the course of your work in preparing documents for ministers about the prosecution of postmasters and mistresses that had been carried out prior to the introduction of the Horizon system? Did you know the Post Office prosecuted?

Dr Sarah Graham: If I did, I can’t recollect anything now. But it’s quite possible I was not aware.

Mr Stein: Were you given any information that you can see in any of the documents that you have been provided with that set out the fact that the Post Office was going to use the Horizon system as the basis for investigations and prosecutions?

Dr Sarah Graham: No, I was not aware of that.

Mr Stein: To your knowledge and recollection, you’ve mentioned the discussed live trials, was there any consideration of live trials in relation to the investigation and prosecution system?

Dr Sarah Graham: Not to my knowledge.

Mr Stein: Thank you, Dr Graham.

Dr Sarah Graham: Thank you.

Ms Hodge: Sir, I think that concludes the questions that both the Inquiry and legal representatives would like to put to Dr Graham. Unless you have any further questions, she may be released.

Sir Wyn Williams: No, thank you very much, I have no questions.

I would just like to convey my thanks to you, Dr Graham, for submitting your witness statement, taking the time and trouble to review all the documents which were sent to you, and coming to give evidence this afternoon.

So thank you very much.

Dr Sarah Graham: Well, thank you very much and, if I might say, I would like to be as helpful as I could be to such an important Inquiry.

Ms Hodge: Thank you.

Sir Wyn Williams: Well, I think you and I can safely conclude that the importance of the Inquiry has been impressed upon me on many occasions, Dr Graham. Thank you very much.

Dr Sarah Graham: Thank you.

Sir Wyn Williams: So, 10.00 tomorrow morning, Ms Hodge, yes?

Ms Hodge: Yes, sir, thank you.

Sir Wyn Williams: Thank you very much. Bye bye, everyone.

(4.05 pm)

(The hearing adjourned until 10.00 am on Friday, 25 November 2022)