What have been the additional costs of the crisis and who will bear the cost?

The cost of the additional measures taken by the Agency earlier this year will total £12.6 million, excluding the extra costs borne by Siemens.

3.20  The total cost of the measures taken by the Agency to cope with the delayed roll out and subsequent crisis is expected to total £12.6 million. This includes some one-off costs such as the Post Office fee for handling passport extensions, and a higher unit cost of passport processing resulting from additional staff and other measures. Figure 27 provides a breakdown of these costs. The methodology used to calculate this figure is explained at Appendix 2.

3.21  The amount paid to The Post Office in return for providing free extensions to passports is £2 million for July and August with a further payment to be made for extensions issued in September. Although the Agency has a partnership arrangement with the Post Office to help process applications, at the time these measures were introduced, the Agency's contract did not cover this eventuality.

3.22  The costs in Figure 27 exclude the additional costs borne by the Agency's contractors. As a result of problems at both Liverpool and Newport, Siemens had to recruit and bear the cost of around 60 additional staff on top of its initial complement of about 155 staff. Because the Agency's payments to Siemens are based on the volume of passports processed, the decision to postpone the roll-out has also reduced the Company's income, to £5.4 million for the year from October 1998 compared to the original estimate of £14 million. The payment to Security Printing & Systems Ltd for a reduced volume of new digital passports but increased volume of old-style passports is expected to be close to the Agency's original budget of £15 million for 1999-00. For the year from October 1998 the Agency is likely to have processed 1.8 million passports through the new system, less than its minimum contractual commitment to Security Printing & Systems Ltd, resulting in an estimated cost of £680,000 for digital passports not printed.

3.23  The processing problems may also have incurred non-financial costs, such as an increased risk that the security of the passport issuing process might be compromised. For example, some of the postal applicants, who had visited a regional office to follow-up delayed applications, had to make a second application at the counter. Whilst the Agency has procedures in place to help prevent the issue of duplicate passports, there is a risk that some applicants will receive two. Although the Agency will take steps to retrieve a duplicate issue it is sometimes reliant on the public volunteering that they have received a duplicate passport, and cannot be sure of the total number of duplicates issued. The new system will be able to detect duplicate applications.

The unit cost of producing a passport in 1999-2000 is likely to be between £15 and £15.50, including the impact of the exceptional measures, compared to the target of £12 in the Agency's corporate plan. The longer-term impact of the system on unit cost remains uncertain but the Agency's best estimate is around £14.

3.24  The business case prepared by the Agency in July 1997 estimated that the unit cost per passport produced under the new system would be around £12.09 (at 1999-00 prices), assuming a volume of four million passports a year. At that time, the unit cost to the Agency of producing a passport was about £11 per issue (at 1999-00 prices). The Agency believed that the increase in the cost of the new passport was warranted by the additional security it afforded, especially through a digital image of the passport holder and the modernised issuing arrangements.

3.25  Design changes to the project, such as a facility for retaining electronic images of application forms, added further additional costs. However, the most significant changes related to the Agency's request for additional computer equipment. As a result, the unit charge paid to Siemens per passport increased from £2.39 in the initial contract to £2.72, a 14 per cent increase; and the principal unit charge payable to Security Printing & Systems Ltd, assuming full roll-out of the system, increased from £2.92 to £3.21, a 10 per cent increase, reflecting the introduction of additional security enhancements to the passport document above those envisaged in the business case.

3.26  The Agency now estimates that the cost of producing a passport in 1999-00, including the cost of the exceptional measures taken to cope with the crisis, is likely to be between £15 and £15.50. The Agency expects the unit cost to be around £14 during the remaining period of roll-out of the new system. It expects the cost to reduce thereafter to reflect the operation of a single issuing system and potential productivity improvements. However, the Agency is planning to introduce a series of measures to prioritise customer service that were not part of the original business case assumptions. These measures are discussed in paragraph 3.35 below and may further increase the unit cost significantly.

The Agency had received, by the end of August compensation totalling £69,000 from its contractors for shortfalls in performance. The Agency had waived other compensation from Siemens, estimated by the Agency to be worth £275,000.

3.27  The Agency negotiated service standards with each of its contractors. If the contractors fail to meet these standards, the Agency can automatically claim financial recompense through the receipt of "service credits" payable to the Agency at an agreed rate.

3.28  By the end of August, the Agency had been paid a total of £69,000 in service credits. Security Printing & Systems Ltd had agreed to pay around £4,000 - all the credits due from it under its contract. Siemens had paid £65,000; but the Agency had waived other credits estimated to be worth £275,000 for poor processing times prior to July and had still to receive further credits worth £62,000 for performance in July and August (Figure 28).

3.29  Siemens is required to process routine applications and make them available for examination by the Agency within 15 hours of receipt of post. Siemens has had difficulty in meeting this target and has expressed concern whether the target is achievable during periods of unforseen exceptional demand. The Agency had expected the target to be applied from the first day of operation at Liverpool, but following postponement of the roll-out it agreed to not to apply the target until 31 March 1999 to allow time for the new system and procedures to settle down. At Siemens' request the Agency further agreed in May to extend the waiver until the end of June 1999. Siemens had earlier agreed, at the Agency's request, to alter some of it's procedures in response to the surge in applications and, in return, had asked for service credits to be waived. Siemens had also experienced difficulty in scanning data from some of the Agency's application forms due to problems with the forms themselves. The Agency, with its partners, had been responsible for ensuring the forms met the specification required for the scanners. In granting the extension, the Agency intended to allow Siemens time to clear its backlog and to acknowledge the higher than anticipated demand experienced by its partner.

3.30  In Siemens' view, the amounts in Figure 28 may overestimate the sums due because they include charges for delays in processing multiple applications when only one application has to be held back for a query or correction. On the other hand, the £275,000 for service credits waived between October 1998 and the start of July 1999 may understate the true position because until July 1999 the Agency did not have formal arrangements for counting the time post had spent unopened before being logged on to the system; for example, we estimate that in June alone additional service credits of £120,000 might have been payable in respect of unopened post.