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The Government's innovative £273m individual learning account (ILA) programme failed after ministers rushed the scheme into place too quickly, to meet an election manifesto promise, an independent enquiry revealed last week.
The ILA programme, which collapsed last year after revelations of widespread fraud and abuse, was flawed from the start, with no proper business plan, a imperfect contract, and insecure IT systems, the National Audit Office (NAO) said.
The scheme was designed to offer financial incentives to encourage the unemployed and those with few qualifications to take short courses in IT and other work-related areas from private training companies.
But unscrupulous training organisations were able to exploit security weaknesses in the Web-based administration system, developed by the Government's business partner Capita to recover subsidies of £200 per trainee for training they had not provided.
The full scale of the losses has still not been established but the NAO estimates that as many as 400,000 of the 1.5 million individual learning accounts, worth some £80m, may have been registered fraudulently.
Many more students may have been offered substandard training, which in some cases consisted of little more than a badly photocopied Microsoft manual.
"This is one of the worst cases we have seen," Martin Pfleger, deputy auditor general at the NAO told a news conference last week. "There may be other cases of this scale, but not many."
The problems began soon after ministers put the ILA programme out to tender at the end of 1999. Four of the six companies bidding for the project pulled out, citing unrealistic time-scales as a major obstacle, but their concerns fell on deaf ears among education department for officials, who were more concerned with meeting the manifesto deadline.
Capita, the company which eventually won the contract, also raised early concerns about the tight timescale and the potential of the scheme for abuse, but these also went unheeded. Warnings from the Training and Enterprise Councils, and the Further Education Funding Council were also ignored.
There were major flaws too in the education department's contract with Capita. The contract failed to lay down any clear obligations on the security of the IT system needed to run the ILA scheme. Although Capita's bid acknowledged the need for "rigorous security procedures" and the need to make the system "robust" against fraud, in practice these issues fell by the wayside.
The education department, assumed wrongly that, with such small sums at stake, £200 on average per trainee, fraud was unlikely to be a problem. Officials were far more worried that the programme might fail to attract the one million learners promised in the manifesto, and focused their efforts on keeping it simple to attract as many people as possible. As a result, there was no proper assessment of the risks of the project, and little thought given to how fraud could be detected.
Capita, for example, kept detailed logs of the activities of the learning providers using the online ILA system, but it did not have the controls set up to prevent or detect unusual behaviour. The system could identify multiple applications being made from one address - a strong indication of fraud - but it could not prevent it.
Similarly, no attempts were made to monitor the number of individual learning accounts registered by each learning provider. The NAO later discovered that 13 training providers had registered over 10,000 accounts each, twice as many students as an average further education college, within a matter of months. Some 20 providers had claimed more than £1.5m in subsidies and one, more than £6m in subsidies, a clear indication of potential fraud.
A decision by the Department for Education and Skills (DfES) to exclude Capita from the ILA project board created further problems.
Officials felt that Capita's presence would stifle discussions on policy. But it meant that rather than working together with DfES, to develop the system and operate the scheme, Capita was functioning as a contractor, not the business partner originally envisaged under the public private finance initiative. The department, it emerged, was effectively bearing all the risk of a project, despite having outsourced the work to its strategic partner.
The lack of quality control meant that many of the courses offered to students were below standard. There were more than 16,000 complaints from consumers.
Similarly many learning providers claimed subsidies for courses which should have been ineligible under the scheme, including transcendental mediation and exercise to music.
The NAO's findings have alarmed MPs on the Commons Public Accounts Committee, which will conduct its own hearings into the affair. "The DfES cut almost all the corners it could. There was no proper financial planning or business model and security arrangements were risible," said Edward Leigh, chairman of the committee.
Fraud investigations will continue for at least another two years. The DfES was investigating some 563 training providers which have been paid £97m in August. The department's special investigations unit is investigating 133 providers which have claimed a total of £68m.
Some 98 of these cases have been passed to the police in an investigation which spans 10 police forces.