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Supplier's strength is PFI's fatal flaw

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Suppliers hold whip hand over intellectual property

The Government can't sting Andersen Consulting for further compensation for the botched Nirs2 computer system because the contractor has Whitehall by the short and curlies. That - behind the parliamentary language - is the meaning of last week's Treasury announcements, which capped Andersen's compensation for failures and delays to the new Inland Revenue system at £4.1m.

Corporate IT users in the private sector know that position well - when an outsourcing firm screws up, there is often so much at stake for the core business that sacking them is counterproductive. Hence the existence of a whole layer of senior IT decision-makers skilled in the arts of managing the relationship with outsourcers.

But the latest furore over Nirs2 highlights a specific problem with government IT: the risk of moral hazard associated with the Private Finance Initiative.

PFI seemed like the perfect solution for governments committed to low public spending. In return for private funding, which does not show up as public borrowing, the private sector would reap massive rewards over a prolonged period - and own the assets created.

However, there is a difference between a hospital building and a computer program. The latter is intellectual property capable of being re-used and replicated for massive gain elsewhere. A new hospital stays where it is - and has to be actually built to be owned by its private sector creators.

It seems that with Nirs2 the contractor owns the intellectual property before the system is even delivered. In short, it cannot be sacked without starting the project again from scratch.

There is huge moral hazard in this. With private sector outsourcing disputes there remains the possibility that the customer may call a halt after a series of failures. If PFI contracts rule this out, asking Whitehall to deliver private-sector style management of outsourced projects may be wishful thinking.

As ministers consider the future of PFI, they may want to ask why the system requires the customer to bear 90% of the costs of failure.


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