1.20 Following Pathway's request for improved terms, the risks associated with reaching the right decision for the public sector as a whole were managed by adopting an interdepartmental approach. Ministers set up in March 1998 an Interdepartmental Working Group made up of officials from the Treasury, Cabinet Office, and the Departments of Trade and Industry and Social Security to assess:
■ whether the project was technically viable, and if so how quickly it could be completed and at what cost to government; and
■ the direct and indirect costs of cancellation and of any alternative available to deliver the project's objectives.
During this period work continued in Pathway, and in the purchasers' organisations, on developing the Payment Card system. The main conclusions of the Working Group, prior to negotiations with ICL Pathway on the way forward, are in Figure 9.
Figure 9 |
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| Main Conclusions of the Interdepartmental Working Group, July 1998 |
On risks of continuing the project | An independent panel advising the group felt that the project could deliver the functions required, but was unlikely to operate nationwide much before the end of 2001, three years later than originally planned. Successful delivery would require renewed commitment from the parties and was not without risk. The cost of continuing was uncertain; delays and cost overruns already meant that Pathway would make a loss without a contract extension or price increase. |
On risks of terminating the project | The group stated that there appeared to be sufficient grounds to terminate Pathway's contract and claim against them for up to £200 million of lost fraud savings. Pathway rejected this and would almost certainly counter-claim against the purchasers for their own abortive costs. Legal advice was that the purchasers' position was strong but the outcome of litigation would inevitably be uncertain. The indirect costs of cancellation depended on the alternative arrangements put in place. The Department of Social Security's preference for a solution based on bank transfers could deprive post offices, earlier than otherwise would have been expected, of their largest source of income, unless a compensatory strategy was provided. |
The recommended way forward | A majority of the working group recommended that government offer Pathway an extension of the existing contract to ensure a five year period of operation following full implementation, but no price increase. If Pathway did not accept these terms within two months the contract should be terminated. The Department of Social Security recommended reshaping the contract to exclude the Benefits Payment Card, moving to bank transfers and redirecting administrative savings to help support the post office network for the life of the existing contract. |
Source: Working Group report, July 1998 | |
1.21 The interdepartmental approach adopted from March 1998 onwards required the construction of a single business case for the project, addressing the costs and benefits of each option to the public sector as a whole. The Treasury appointed consultants KPMG to undertake this work, drawing on data from the Department of Social Security and Post Office Counters Ltd, while maintaining commercial confidentiality between the two businesses.
1.22 The Department of Social Security's "Notice of Cure" on Pathway preserved their option to terminate but formally expired in August 1998. This placed the Benefits Agency's Accounting Officer, Peter Mathison, in a difficult position. Whilst awaiting the outcome of the interdepartmental decision on the fate of the project, his own responsibility to obtain value for money was at risk. He informed the Secretary of State for Social Security that he could no longer justify continuing the contract. This was on the grounds of the delays to date, signs of further slippage, their impact on costs and continuing concerns about the deliverability of the project. For each month of delay the Department were incurring some £15 million of additional administration costs and lost fraud savings. Mindful that Ministers were considering the future of the project, Mr Mathison sought formal instruction not to exercise his rights to terminate. In response, the Secretary of State instructed him not to cancel until a joint Ministerial decision involving the Treasury and the Department of Trade and Industry could be reached.
1.23 In September 1998, Ministers asked the Department of Social Security and Post Office Counters Ltd to join discussions with Pathway about the way forward. The Secretary of State therefore issued a further instruction to Mr Mathison not to cancel or otherwise prejudice the outcome of these discussions. As required by Government Accounting practice, both instructions were reported to the Comptroller and Auditor General, who brought their existence to the notice of the Chairman of the Committee of Public Accounts.