1 In May 1996 the Benefits Agency of the Department of Social Security and Post Office Counters Ltd (the purchasers), jointly awarded a contract to Pathway, a subsidiary of the ICL computer services group. The Benefits Payment Card project was intended to replace by 1999 the existing paper-based methods of paying social security benefits with a magnetic stripe payment card, and to automate the national network of post offices through which most benefits are paid across Great Britain and Northern Ireland.
2 The project was vast in its scale and complexity, and estimated to cost some £1 billion in payments to Pathway. It was also one of the first Information Technology contracts awarded under the Private Finance Initiative. Under such deals the supplier receives a contract to design, build, finance and operate an asset, and is paid for the provision of the service only as it is successfully delivered. The purchasers, (the Benefits Agency and Post Office Counters Ltd), used the Private Finance procurement method because they did not expect to have the capital resources to develop the Benefits Payment Card themselves, and wished to transfer to the private sector risks of developing and delivering a working system and preventing fraud. The Department's business case for the project was based on achieving the potential fraud savings from introducing the new system. This meant that any significant delay in delivery would begin to erode the business case.
3 The overall objectives of the project were to:
■ provide a virtually fraud-free method of paying benefits at post offices that was automated, had lower end-to-end costs than the current paper-based process, with continuously reducing overall administration costs year on year;
■ extend automation to Post Office Counters Ltd's transactions for other customers, its products and its support processes to improve competitiveness, increase efficiency, and to enable greater commercial opportunities;
■ enable full and speedy reconciliation of benefits payments, with accounting arrangements consistent with recognised accountancy practices; and
■ provide an improved service to both purchasers' customers.
4 By October 1996 the contracting parties had successfully implemented a limited version of the system, which paid child benefit in ten post offices in Gloucestershire. Development work continued and further functionality was added through successive software releases which were used in 205 post offices. But designing and developing a fully functional system proved much more complex and took much longer than had been expected. The programme at the time the contract was signed assumed that it would take ten months to start a live trial of the full system intended to cover 24 different benefits and all of the 19,000 post offices then in the network. In fact, this stage had not been reached at the time the contract was terminated nearly three years later.
5 During the second half of 1996 the two purchasers and Pathway became increasingly aware of the difficulty they faced in developing the full payment card system. Discussions were opened that led in February 1997 to a "no-fault" replan of the project. Under this plan, all parties agreed to defer the final delivery dates by three months and to bear their own costs in doing so. Subsequently the Department introduced new customer accounting and payment systems covering four benefits and holding records of 16 million customers, releasing the software in time to link with equivalent phased releases of Pathway's new Card Payment systems.
6 Despite the replan, the project continued to make slow progress, for reasons explained in paragraphs 14 to 24 of this summary and in Part 3 of this report. Though Pathway delivered intermediate releases of software, by 21st November 1997 they had not completed, as required by the replan, a live trial to demonstrate satisfactory, sustained operation of child benefit payments and a range of Post Office functions in 300 post offices. The purchasers served on Pathway a formal notice of breach of contract, which Pathway denied and did not accept liability for, counter-asserting breach of obligations by the purchasers. In December 1997 Pathway wrote to the Benefits Agency suggesting that if the project were to continue they would either have to increase their prices by 30 per cent or extend the contract by five years and raise prices by five per cent.
7 The Department were not in a position to take unilateral action, but recognising the continuing difficulties, sought interdepartmental discussions involving primarily HM Treasury, the Department of Trade and Industry and the Prime Minister's office to reach a wider cross-government solution. Post Office Counters Ltd and Pathway were also involved. In July 1998, an independent panel of experts concluded that the project could deliver the functions required, but was unlikely to operate nation-wide much before the end of 2001, three years later than originally planned. They stressed that successful delivery would require renewed commitment from the parties and was not without risk. The cost of continuing was uncertain.
8 Discussions between government and ICL in late 1998 failed to close the gap between both sides' proposals for continuing the full project. From January 1999 discussions turned instead to the terms on which the automation of post offices could proceed without inclusion of the Benefits Payment Card.
9 In May 1999 the government decided that removing the payment card from the project offered better value for money than complete cancellation, would better protect the early automation of the Post Office, and was preferable to continuation. They devised a new strategy with the following key features:
■ the Benefits Payment Card element of the project would be dropped, simplifying and assuring post office automation;
■ automation of the Post Office would proceed, for completion by 2001;
■ benefits payments would be made by automated transfers to claimants' bank accounts; starting in 2003 and completing by 2005. Until 2003 existing arrangements would continue;
■ people who wished to continue to collect their cash at post offices would continue to be able to do so. The Post Office would introduce suitable banking technology and commercial arrangements with banks to allow this to happen; and
■ for the relatively few people for whom a bank account may remain an unsuitable option, special arrangements would be made.
10 In June 2000 the Secretary of State for Trade and Industry announced a package of measures designed to modernise the Post Office network by;
■ ensuring that benefits and pensions can still be paid in full, in cash at the local post office;
■ setting up a special fund to improve local offices in deprived urban areas;
■ providing help for those on low incomes;
■ providing people with new opportunities to use the internet;
■ encouraging post offices to act as Government one-stop shops;
■ maintaining the rural network by placing a formal requirement on the Post Office to prevent any avoidable closures of rural post offices; and
■ supporting the development of the proposed "Universal Bank", giving banking facilities for up to 3-5 million extra people, and allowing customers, including pensioners, to get cash out of the post office and set up direct debit arrangements.
11 The delays to the Card project and its subsequent cancellation affect benefit claimants, the Department of Social Security, the Post Office and ICL. These consequences are described in Part 1 of this report.