It's five years since the government kicked off a new way of buying IT - the private finance initiative (PFI). PFI's innovative structure aimed to end scandals in government procurement, where, in IT for example, millions of pounds were wasted on buying systems that arrived late and outdated.
The record of PFI in the time since has been mixed at best and a series of recent debacles, including the recent one at the Passport Office, has forced Tony Blair to call for a government review of government IT projects.
Blair's review will find PFI has totally failed to improve the speed of delivery of information technology. Contract and delivery deadlines have been repeatedly missed. At times the delays have had major negative impacts on the public.
(To open up vnunet.com's exclusive table showing the history of government PFI IT projects, click here)
P>Mistakes and problems just keep turning up. In the course of this investigation vnunet.com has already discovered further evidence of PFI's failure - rock bottom staff morale in the newly privatised National Savings and a whole tender quietly shelved without announcement or reporting by the British Library after nearly 18 months.
Months have been lost in the massive rewrite of all social security databases because a key assumption in the original deal, that staff would not transfer, has been overturned in a new round of negotiations with the supplier EDS. As a result little progress has been made this year.
PFI differs from normal procurement, in which the government simply buys a service from the private sector. Instead the supplier develops a system or service and leases it back to government, a form of borrowing at higher interest rates than government pays.
In return government gets new technology at no capital cost, delivered, in an ideal world, more efficiently by a private sector motivated to make a profit. And if the supplier struggles to deliver, government doesn't have to foot all the bill - although there are still substantial costs that stem from non delivery.
In five years PFI - which also applies to other types of government buying such as construction - has already had to be reviewed twice. Now all IT buying is under special review, because in the words of new government e-minister Patricia Hewitt, "nobody is satisfied with the delivery of IT [in government]".
That includes whether PFI is even an appropriate mechanism for delivery of new IT systems. Intriguingly, the department that's held up as the best at IT delivery is the Inland Revenue, which has a good old fashioned multiple project outsourcing deal with EDS. The Revenue doesn't like talking about it on the record, but actually they're rather quietly pleased that they didn't strike a PFI deal.
So what's gone wrong?
There are two problems: First that PFI for IT is much more complicated than PFI for construction - so complex that banks do not like funding it. And second, the public sector has failed to live up to the challenge of an innovative method of procurement. Instead, it has continued to make repeated, and at times painfully obvious, errors.
What makes information technology more complex is that it is very difficult to model in advance how successful a project will be. It is relatively easy to work out how many people might use a road if you built it from A to B, and possible to calculate how heavily used a hospital will be. But it's extremely hard to work out how popular a new IT application is going to be - ask anybody who's built a website.
Until recently banks have taken a dim view of this uncertainty. IT PFI projects are capital financed directly by the suppliers themselves, which exposes suppliers directly to high degrees of financial risk. So far only one deal has been directly backed by a bank. That was ICL's deal to supply a new destkop and network infrastructure for Customs and Excise. Backed by the bank of Tokyo-Mitsubishi, it was signed off only in September
When ICL's contract with the social security Benefits Agency was cancelled earlier this year it had to write off £180 million, a loss that tipped it and, to a lesser extent, its parent Fujitsu into the red.
Stoically ICL has remained chasing other contracts. But not Andersen Consulting, which lost perhaps as much as £125 million on an over-optimistic bid and troubled rewrite of the national insurance database. It has hardly been seen bidding in the market in the last two years. How long suppliers can be expected to be comfortable with the risk remains an open question.
Only three of this country's top seven IT suppliers, EDS, ICL and Sema, actively bid for major contracts now. The list is buttressed only on occasion by Siemens and BT - firms that have been able to break into the market because they are big enough to take on the capital risk, rather than because they are highly experienced in this type of deal. No other firms are big enough to take on the risk.
More fundamentally, the relationship between private and public sector in PFI deals has mirrored ex-lovers, not business partners. The axiom of good systems development - keep your requirements and objectives fixed - has been repeatedly ignored in favour of constant meddling, leading to falling out.
One exasperated supplier executive involved in a delayed contract said: "Civil servants have got to learn to set the requirements and step back from a contract."
On top of that, in project after project too much has been taken on. The PFI plans to deliver a paper-replacing workflow system for the asylum and immigration service, on top of a business process re-engineering project, simply proved too ambitious. When the IT development became delayed the BPR exercise continued, including plans for an office move. The move threw the organisation's paper files into chaos.
Government auditor the National Audit Office concluded in March that "in retrospect" the project was "too ambitious" - a lesson learned in hindsight on many other contracts.
On one level the solution is to use PFI more cautiously for smaller projects, bought by a trained team of specialist buyers and contract managers, rather than the civil servants that happen to be in place that week.
But others, such as William Heath, chairman of consultancy Kable, believe it is time to be more radical. He says government has to stop being a monopoly supplier of services to the public, whether passports, benefits, drivers licenses or whatever and allow direct competition. Poor project delivery should now be punished by extinction; while citizens transfer to another supplier.
Says Heath: "The problem is that government has very little incentive to change. Imagine how hard it would be for a bank that had a total monopoly in the UK embracing online banking."
Special Report: Prime minister Tony Blair's review of government IT, quietly revealed by the Cabinet Office at the end of last month, will open up a Pandora's Box of disaster, delay and dropping morale, vnunet.com reveals in an exclusive report today.
To return to the Special Report index, click here.
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