Examination of Witnesses (Questions 20
MONDAY 26 FEBRUARY 2001
20. Underestimate might be a slight exaggeration,
I would have thought, because the Department signed the contract
and they had no idea of the risks that they were taking. It says:
"The Department took only limited steps to evaluate this
risk before signing the contract. Their May 1996 business case
included no analysis to assess its sensitivity to major slippage
in the project..." In other words, the contract was signed
and it was all pie in the sky.
(Ms Lomax) I think at the beginning when I said that
I thought more work ought to have been done, I was talking about
the work between procurement and the building of the system. The
work that was done up to procurement, I think the NAO says elsewhere
in this report, was competently done, the risks were identified
at that stage, it is just that it should have been followed through
for a fixed price contract with much more detailed work. I think
the work that was done was inadequate for the purposes of the
PFI, then a very novel way of doing a contract of course.
21. So it was a very clear contract?
(Ms Lomax) This must have been one of the very first
Private Finance contracts in the world.
22. With great respect, it is irrelevant
whether it was the first PFI contract or not. The fact of the
matter was you were going into a business contract with the Post
Office and Pathway, as it turned out to be, and clearly the contract
was totally unclear. If you turn to page 52, paragraph 3.7, and
read perhaps the first four or five lines, and I do not want to
repeat them, you can see clearly 289 agreements to agree, 124
with Post Office Counters, 127 with both clients jointly. You
were going into a contract with three of you and you had not got
a clue what you were going into. No wonder it failed.
(Ms Lomax) No, I do not think I can accept that and
I do not think that the NAO Report supports that interpretation
23. The end result proves it though, does
(Ms Lomax) With great respect, the fact that it was
an early PFI did make a difference. This was a fixed price contract
and the risks involved for the contractor were much greater. You
do need more pre-contract work for a PFI than you would for a
24. It does not matter whether it was a
fixed price contract or whatever it was, at the end of the day
the Secretary of State announced in 1996 that by 1999 the system
would be up and going but it was never anywhere near up and going.
(Ms Lomax) I think it is clear to say that all sides
acknowledged that they had seriously underestimated the scale
and the complexity of the task and that was why the whole thing
was fundamentally re-planned in February 1997.
25. I want to come on to that.
(Ms Lomax) To that extent what you are saying has
got some substance. I do not think it is true to say, therefore,
that the procurement was incompetently done and no-one took any
notice of risks because it says in the NAO Report that they did,
it just was not adequate for the scale of the task.
26. That admission to me clearly is pathetic,
to be quite honest, because at the end of the day a huge project
that you were going into was never, ever delivered, not even a
small part of it. Can I ask the three organisations why they went
into a contract that was unclear. Why did you, as the contractors,
go into a contract that was totally unclear?
(Mr Oppenheim) Let me try to answer that. It was not
totally unclear. There was a great mass of definition but some
vital elements were missing. As we have all stated before, we
would now look to get that definition phase done at the beginning.
There was a kind of honeymoon period around the PFIs at that time,
for want of a better description, where people were looking for
quick results and there were a lot of assumptions made, probably
by all three parties, as to what they were going to get out of
it. For our part, why did we go into such an aggressive timescale?
We assumed that there was a mood for compromise on some of these
yet to be agreed requirements. We believed that we were given
comfort in those assumptions because of the time of the essence
timescales which were impressed upon us. I am sorry if I am taking
time. The consequence of that was that we expected there to be
room for manoeuvre, we were encouraged to think innovation and
enterprise and those kinds of things but what we actually found
was that there were a lot of things that were fixed that we could
not move for a variety of reasons that we did not really understand
at the time.
27. Okay. So you went into a contract that,
frankly, you were unclear about. Why did the Department go into
a contract when I cannot find anywhere in the report where it
clearly states that the contractor was given any assurance of
delivery? I cannot see anything in the report which states that
Pathway, or whatever they were called, were actually going to
deliver, there were no assurances.
(Mr McCorkell) At the stage the Department entered
the contract it was based on an extensive procurement process
where something like 400 business requirements were defined. They
were defined at a high level and the PFI philosophy at the time
was precisely design your business requirements at a high level,
allow the contractor to create the solution, do not constrain
them with the detail. This is the major lesson we have all learned
about PFI, that that just does not work.
28. You keep blaming the PFI, but at the
end of the day whether it was a PFI, whether it was in the private
sector solely or whether it was in the public sector solely you
want a successful conclusion to the project. It does not matter
who is delivering it, that is what you want, and there were never
any indications that was going to be the case. Why did the Post
Office get involved when there were no assurances at all?
(Mr Roberts) I think in any contract like this what
you are committing to, and what ICL Pathway were committing to,
is to produce a system by a particular time. I think when we started
the intention was that the system would be rolled out by the end
of December 1999. The contract within the terms of PFI, and I
agree with what else has been said about PFI
29. You would.
(Mr Roberts) I think that was quite clear. It was
clear in the sense that we knew what we were signing. PFI at that
stage was very much about the transfer of risk. If one looks to
the guidelines that were being turned out at that stage on PFI,
they were all stressing that this risk was passed over to the
supplier. We were not quite specifically allowed to
30. As long as the risk gets passed over
it does not matter whether the scheme fails or not?
(Mr Roberts) No. The whole point of passing over the
risk is obviously one is making an assessment of what risk you
are passing over. Do remember, we were being asked specifically
not to design the answer and that was very unusual. In any contract
prior to that that I had been involved with, the first thing that
you do is you try with the contractor, with the supplier, to sit
down and define as closely as you can what you expect to get out
of it. That was not the intention of PFI at the time through the
instructions, it was very much around "you must have a high
level view of what you are trying to do", which we did, we
wanted to automate the post offices, we wanted to automate the
benefits payments. The methods that were then used to do that
under the PFI instructions were down to the supplier to come back
with suggestions for doing it. That was the way, I think, at the
time that it was supposed to encourage innovation from the supplier.
(Ms Lomax) It is still the case that PFI is about
specifying what you want from the service, not how it is going
to be delivered. We know that to have an arms' length black box
approach to that does not work, you need to work together on the
how in order to get the what right.
31. Your Department wanted a scheme which
was going to combat fraud and this was not even written into the
(Ms Lomax) I am sorry?
(Mr Oppenheim) Excuse me, it was.
(Ms Lomax) It was.
32. Not according to the report, it was not.
As I saw it in the report, the purchaser wanted a particular scheme
to combat benefit fraud and yet this was not agreed in the contract.
(Mr Oppenheim) A lot of it was specified in the contract
but there were fine details and the devil turned out to be in
the detail. The notion of an extended verification procedure in
order to target specific verification, via authentication methods
was written into the contract. The detail of how that was going
to be done, how it was going to be targeted, the processes, were
not, and resolution turned out to be quite difficult between the
three parties because of the tensions. There were significant
sums of money obviously and it was very difficult to fix after
the contract was actually signed.
33. That sums it up, frankly. Thank you
very much for that. Once that is written down on the record that
sums up the whole idea. Can I move on. By November 1997 it seems
to me if you read the report that it was pretty clear that Pathway
were not going to deliver the scheme because there had been trials
in the North East of England, there had been trials in the South
West of England and all they had come up with was a Card scheme
which dealt with Child Benefit payments, so it was not very, very
successful. Why did the new Government that had come in in May
1997 not scrap the scheme straight away? Were they giving the
scheme a chance to succeed or what? It was so clear it was going
to fail, why did they not just scrap it?
(Ms Lomax) They had a review because very large issues
were at stake, such as the future automation of the Post Office.
34. It was a doomed project, was it not?
(Ms Lomax) I do not think it was that clear to new
Ministers and they, therefore, I think rightly, had a proper review
to see whether it was capable of succeeding. If you look at July
1998 the Head of the Treasury Task Force, Adrian Montagu, concluded
that the project was deliverable although it would take an extra
35. The new Government was told that, in
fact, it was deliverable?
(Ms Lomax) Yes.
36. By the Department?
(Ms Lomax) Yes.
37. Yet you came into the Department and
within a month of coming into the Department the scheme was dropped.
Was that a coincidence?
(Ms Lomax) It was, yes, actually. The discussions
were very well advanced by the time I arrived.
38. So you are not taking any credit for
(Ms Lomax) I cannot take any credit for it, no.
39. You should have done.
(Ms Lomax) There we are. That was my mere presence.