Post Office computer fiasco 'cost £881m'

The Government's spending watchdog has launched an investigation into a disastrous computer project which led to losses of nearly £1bn and has put the future of 18,500 post offices at risk.

As ministers struggle to overcome a crisis created by plans to cut post offices' income from delivering benefits, they face criticism from the National Audit Office (NAO) over the fiasco. It is expected to say taxpayers' money was wasted when the project was scrapped. Total losses amounted to £881m, with the Benefits Agency writing off £130m, the Post Office £571m and the computer company ICL £180m.

Stephen Byers, the Secretary of State for Trade and Industry, will spell out this week how the Government plans to compensate post offices for the loss, which follows the collapse of the Horizon project.

Postmasters and mistresses say the cut in their income will force many of their businesses to close, depriving rural communities of vital services. The scheme would have safeguarded post offices' trade by giving benefit claimants swipe cards for use there. It could also have cut benefit fraud by more than £320m per year.

But in May last year, with the Public Finance Initiative project years behind schedule and millions over budget, the Government pulled the plug. Instead, most benefits will be delivered through bank accounts from 2003. Now the NAO is examining the scheme and has asked for details of a renewed £1bn contract awarded to ICL after its collapse. The audit office is likely to deliver its report in July.

MPs suggested the renegotiated contract, which will allow a range of government services other than benefits to be accessed at post offices, was given to ICL in a political deal to compensate it for the loss of the swipe-card scheme. All the parties admit they had different aims from the start of the project in 1996, with the Benefits Agency seeing the swipe card as a temporary measure before the introduction of automated bank transfers, the Post Office believing it would safeguard its business for the long term, and ICL wanting a more sophisticated "smart card" instead.

The Benefits Agency has suggested ICL failed to deliver on time and to budget, but the computer firm says delays were due to the agency's failure to hand over vital data.

The project has attracted criticism from the Trade and Industry Select Committee, which found last autumn that ministers had been "less than candid" when they assured MPs they were still committed to the project just weeks before admitting they were not.

It said ICL's new £1bn post office deal was "an essentially political deal to ensure that ICL has a substantial contract with the Post Office, at a price... as a means, however inadequate, of making up some of the £180m written off."

An ICL spokesman said the remaining part of the project was progressing well and 300 post offices were having equipment installed each week. "We have a fair and reasonable contract with the Post Office," he said.

Colin Baker, General Secretary of the National Federation of Sub-Postmasters, said the NAO inquiry would come too late to help his members.

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