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TO:
SIR MICHAEL SCHOLAR ce PS/Mr Byers
PS/Mr Johnson
Mr Davis Hd/CGBPS
FROM: Mr Fraser IBB
Mrs Britton PORT
DAVID SIBBICK Mr Hosker FRM
DIRECTOR-POSTS Mr Hopkins CII
L I Mr Fincham FRM
151 BUCKINGHAM PALACE ROAD Mr Francis CII
LONDON SW1W 9SS Mr Whitehead CGBPS
prvoronnnnmannnnssesecsaccccneaaang Ms Anderson CGBPS
G RO Mr Smith SOLS
i Ms Johnson SOLS
14 July 2000
DRAFT NAO REPORT ON CANCELLATION OF THE BENEFITS
PAYMENT CARD (BPC) PROJECT
Issue
1. Sir John Bourn, Comptroller and Auditor General, has invited your comments
on the final draft report of the National Audit Office on the cancellation of the Benefit
Payment Card project.
Recommendation
2. That you should reply along the lines of the attached draft.
Timing
3. In his letter to you (at Annex A), Sir John asked for comments by 14 July, but
this deadline has effectively been extended to 18 July to allow DSS more time to
resolve their concerns (see below).
Background: the project
4. Contracts for the Horizon project were signed in May 1996. The contracting
parties were DSS/BA and Post Office Counters Ltd (POCL) as joint purchasers, and
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ICL Pathway as supplier. The project was established as a major (£1 billion) public
sector PFI. Its purpose was two-fold:
© to provide POCL and the network of post office counters with a modern, on-line
IT platform needed to retain existing Government and private sector clients and
attract new business opportunities, and to modernise POCL’s internal processes;
and
e using the Horizon platform, to replace the existing fraud-prone and paper-based
methods of paying social security benefits at post offices by a magnetic strip
plastic card, the Benefit Payment Card (BPC).
5. The project ran into difficulties from the outset, with escalating slippages and
cost overruns. In late 1997 Ministers set up an inter-Departmental Review, led by
HMT and including DTI, DSS and the Cabinet Office (primarily CITU), which in turn
drew on the services of a panel of independent senior technical experts, an external
facilitator (Graham Corbett) for the commercial renegotiations, and KPMG to assist
with the evaluation of options. By the culmination of this work the project had slipped
still further, with an estimated completion date some 3 years behind schedule.
Ministers had by then lost confidence in the deliverability of the project in its existing
form even within the extended timescale, and in May 1999 they announced a major
restructuring of the contract. Under it the BPC was cancelled, and DSS/BA removed
from the contractual loop. Instead, DSS/BA were granted their long-held wish to pay
all social security benefits direct into recipients’ bank accounts by automated credit
transfer (ACT), but with migration to ACT not to start until 2003. That part of the
project designed to equip all post offices with the Horizon infrastructure continued,
but on the basis of a re-worked conventional procurement/service contract between
POCL and ICL. This was subsequently put in place, and rollout of the system to some
36,000 counter positions at 18,000 post offices nationwide is currently on target for
completion by late April/early May next year.
The enquiry
6. The NAO enquiry is technically into events culminating in the decision to
cancel the BPC, but inevitably spills over into the Horizon project in its entirety. The
study was initiated two years ago, but NAO largely suspended work on it until after
Ministers’ decision in May 1999 to cancel the BPC element of the project. They are
now under pressure to publish before the summer recess, not least to meet the
concerns of ICL about the impact of publication of the report on their planned
flotation in November, as expressed in their recent letter to the Secretary of State
(Annex B).. NAO’s judgement is that if there is to be a PAC hearing — surely almost
inevitable — it is likely to be December/January, ie after the ICL flotation has been
completed.
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7. Neither DTI nor HMT had any significant involvement in the project (as
opposed to the policy decisions which led to it) until the establishment of the inter-
Departmental Review in late 1997. That part of the report which relates to the letting
of the contract and the early problems with the project has therefore largely been left
to DSS/BA and ICL to fight over. NAO had limited access to ICL under the terms of
the contract, but ICL have chosen to cooperate voluntarily well beyond this. The third
contracting party, POCL, have maintained a strict policy of no formal cooperation
with NAO (as the Post Office have also done with the parallel NAO enquiry into the
acquisition of German Parcel). We have however consulted POCL extensively and
where appropriate have fed comments to NAO direct. We have also maintained
contact with ICL throughout.
The report
8. The main conclusions of the report are perhaps best seen at paragraph 29 of the
extract from the Executive Summary appended to this note. The tendering process
and evaluation of the bids, and the early stages of the project are a sorry mess for
which all parties take a share of the blame. The three-cornered contractual
relationship is an object lesson in how not to take forward a project of this kind. The
endless wrangle between DSS/BA and ICL on whether ICL was deliberately set up as
the fall-guy to take the blame for project delays to disguise BA’s failure to have the
CAPS feeder systems ready in time is not definitively resolved.
9. The study focused on two key areas:
e The reasons why the BPC project failed to meet its objectives; and
e Whether there are useful lessons that should be learned from (for?) other projects
particularly in terms of the approach taken towards management of risk.
10. The report is presented in four sections:
Executive Summary: incorporating a conclusion and section on lessons learned
(pp.1-14).
Part 1: addresses the aims of the project, the severity of the slippage; the
interdepartmental review of the project and decision to cancel the BPC element of the
project; and the consequences of this for future benefit payment arrangements and for
the post office network (pp.15-39).
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Part 2: focuses on the key risks to the DSS business interest in the project (ie
delivering benefit payments) and how well these were managed (pp.40-48).
Part 3: examines the key risks of the project itself, covering the early arrangements
for identifying risk and the procurement process; DSS’ own CAPS programme; and
how well risks were managed throughout the project history (pp.49-73).
Our objective
8. Given how badly wrong the project went almost from day one, the NAO report
could hardly fail to make uncomfortable reading to a greater or lesser extent for each
of the key players. Within this, however, our objective has been to secure a report
which focuses in a positive way on the lessons to be learned from the project, and
which without pulling punches at least avoids unnecessary criticism that could
gratuitously damage the commercial prospects either of ICL (and through them our
relations with their parent, Fujitsu) or of POCL. Beyond this, and within the same
context, we have also sought to secure a report which wherever possible avoids
reheating in full public view the three-cornered battles and bitterness that
characterised much of the contractual relationships, and which could now damage the
still-fragile but improving relationships between POCL and DSS/BA, and between
POCL and ICL, both of which are essential if Ministers’ ambitions for a smooth
migration to payment of all benefits by ACT, and a new future for POCL, are to be
realised.
9. Overall, and stressing again the constraints imposed by the reality of just how
badly the project went off the rails, we believe that after 18 months of negotiation with
NAO, working for the most part through DSS as the lead Department, we have
achieved our objectives. Perhaps the best measure of this is that until the last minute
changes made by the C&AG to the Executive Summary, ICL, DSS/BA, HMT, and
(subject to the one proviso set out at paragraph X below, which we support) POCL,
had all expressed themselves broadly content with the result.
DSS concerns
10. Ata very late stage, and after Departments thought they had effectively reached
an accord with the NAO team on the text of the report, the C&AG personally made a
series of changes to the Executive Summary. These seriously upset DSS. They
included a substantial shortening of the Summary (in itself no bad thing) and the
addition of a number of paragraphs (29-31) drawing conclusions. Taken alone, this
redraft risks leaving the reader with a strong impression that responsibility for the
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problems encountered by the project rests in very large measure with DSS/BA. This
is both unfair and inconsistent with the main body of the report, which properly
attributes blame more widely between the contracting parties.
11. We and HMT officials have supported DSS efforts to secure a more balanced
presentation (see also Sir Andrew Turnbull’s letter at Annex C) and urgent exchanges
are continuing. But we have also made clear the need for rapid resolution to ensure
that publication of the report is not delayed until the autumn. A revised text of the
conclusions paragraphs that NAO officials have said they will suggest to Sir John
Bourn is appended to this note, but is unlikely to be the last word. At Annex D is a
draft of a letter which Rachel Lomax may send later this evening to Sir John, refusing
to accept the report as drafted.
POCL?’s concern.
12. There is a suggestion at a number of points throughout the report (including for
example at paragraph 17 of the Executive Summary) that POCL either had, or was
perceived to have had, a lower financial incentive than did DSS/BA to move quickly
from order books to the benefit payment card. Whilst this is self-evidently true on the
narrow issue of the BPC itself, POCL had a very powerful incentive to want the
earliest possible completion of the Horizon project as a whole in order both to retain
existing Government and commercial clients and to exploit the commercial
opportunities that without a modern on-line system were increasingly passing them
by. Indeed, Ministers’ final decision to continue with the project in a restructured
form was very much predicated on POCL’s need for such a system to be completed as
quickly as possible. POCL’s strong — and very well documented — preference was for
the system with the BPC, rather than without it. This is an issue which DSS have
previously raised with NAO on our behalf, but given POCL’s strong feelings on the
subject we have warned NAO officials that you may want to give it a further run with
Sir John, and we are currently discussing with them possible compromise text.
13. A draft letter for you to send to Sir John Bourn is appended.
DAVID SIBBICK
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