ICL stumbles on Pathway to hell

News Analysis: The pounds 1.5bn scheme to computerise benefit payments may be IT's most expensive flop

THE INFORMATION technology industry has been responsible for some spectacular and expensive flops in its short history. Now it may be about to witness its most costly and embarrassing failure to date - the collapse of a pounds 1.5bn project to computerise social security benefit payments through the Post Office.

The Pathway project, led by the UK computer services company ICL, is nearly three years behind schedule, hundreds of millions of pounds over budget and riven by Whitehall infighting.

If the scheme is scrapped, it will be a severe blow to all parties involved. First, it would threaten the survival of hundreds of rural post offices. Second, it could derail the planned flotation next year of ICL, which is owned by the Japanese computer giant Fujitsu. And third, it would be a severe embarrassment for the Government's Private Finance Initiative, under which the Pathway project is being funded.

The scheme was unveiled by the then Conservative Social Security Secretary, Peter Lilley, at the Tory Party conference in 1995, with a promise it would be up and running within three years and saving the taxpayer pounds 150m in fraudulent benefit claims. It may now fall to one of Mr Lilley's successors, the present Secretary of State for Social Security, Alistair Darling, to admit defeat.

Save for the Channel Tunnel Rail Link, the Pathway contract to automate the benefit payments system by replacing giro cheques and order books with electronic smart cards remains the biggest, most ambitious project awarded through the PFI.

Under the contract, the system was to be installed by mid-1998 and in use at all 19,000 post offices around the country, dispensing some pounds 70bn worth of benefits to 19 million claimants through some 890 million individual transactions a year.

As with all PFI projects, it involved the transfer of risk from the public to the private sector. ICL would bear the cost of installing the system and training some 70,000 Post Office staff to use it. In return the company would receive a "toll" payment every time one of its cards was used to claim benefit.

As of today, the system is being used at just 200 post offices in north- east and south-west England by 38,000 claimants. However, ICL now says it is almost ready to begin the national roll-out. At the end of this month a further 100 post offices will be linked up and then, from late summer onwards, it will be installed at the rate of 300 post offices a week. The 18-month roll-out is scheduled for completion by spring 2001.

An ICL spokeswoman says that since trials began in the north-east and south-west, fraudulent benefit claims worth pounds 2m have been stopped and 19,000 benefit books impounded. But these modest successes may have come too late to save the project.

Pathway has been under review in Whitehall for more than a year. If the Government is going to axe it, now is the time to act. ICL is estimated to have spent more than pounds 200m on the project already, but total costs could reach pounds 500m. In order to recoup its costs, particularly in the early years of the concession when it will run into acute cash-flow problems, ICL has demanded a rise in toll payments.

The Benefits Agency, as the primary customer of ICL, is in a difficult position. On the one hand, the projected savings of pounds 150m a year have already been factored into its budget. On the other, the higher toll payments ICL is asking for could cancel out a large slug of those savings.

On balance, and supported by the Treasury, Mr Darling is thought to have concluded that the project should be axed, even though it would open the floodgates to compensation claims against the Government.

However, Pathway has received the strong support of the Secretary of State for Trade and Industry, Stephen Byers. He realises the serious effect scrapping it would have on the Post Office. John Roberts, chief executive of the Post Office, said: "This is a key project and one that we want to see go ahead. The system works and our staff like it. We do not want to see this project axed."

Post Office executives estimate it would take at least three years to develop an alternative system for computerising benefit payments. Worse, they are concerned about all the other business that could be lost.

The electronic swipe cards can be used for purposes other than benefit payments. They can be used to conduct virtually any transaction at a post office, from sending a parcel overseas to buying holiday insurance or paying a utility bill. Ultimately, ICL says, the technology could be used for home banking, stakeholder pensions and even operating individual savings accounts (ISAs).

If Pathway is scrapped, rural post offices will lose out on this business. Worse, from the Post Office's point of view, it could increase the pressure for benefit payments to be made direct into claimants' bank accounts via automated credit transfers.

However, there are big problems with this option, too. There are 7 million people in Britain without bank accounts, many of whom rely on benefit payments. Forcing them to open accounts would be fraught with difficulty, and there is no incentive for the banks to make it any easier as these would be unprofitable customers.

If the project is scrapped, there will be egg on plenty of other well- known faces. Bill Gates's Microsoft is providing the software platform for Pathway, while the US corporation Oracle is developing the actual software. BT is providing the communications network and De La Rue - the bank-note printer and one of the partners in Camelot - is producing the swipe cards.

John Bennett, managing director of ICL Pathway, is adamant that the system will operate satisfactorily. "We have had the system independently audited and it was best in the class of any commercial system. In fact, it is probably achieving military standards of security," he said.

All the while the project has hung in the balance, ICL has remained remarkably confident about its future. Even now, as the storm clouds gather, it remains extraordinarily relaxed. "We are looking forward to the outcome of the review positively," says the spokeswoman. "There is no chance of the project being canned. Postmasters love it, the customer loves it. Why would anyone want to axe a project which is so successful?"

ICL will surely not have long to wait now for the answer.

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