The problem with PFI

The latest twist in the NIRS2 saga raised fundamental issues about government control of IT outsourcers and the future of private finance initiative deals.

The latest twist in the NIRS2 saga raised fundamental issues about government control of IT outsourcers and the future of private finance initiative deals.

Ministers have grown sick and tired of standing up in the House of Commons and explaining away the failings of the NIRS2 National Insurance records system.

Year after year, they have had to account for why pension payments were wrong or delayed and have been forced to squirm as the deadline for full functionality has slipped and there have been further delays.

That is why MPs and the public might have expected ministers to announce in person to the House of Commons the decision to seek no further compensation from Andersen Consulting, which runs NIRS2 under a private finance initiative deal. Instead the announcement was rather more muted, slipping out as a parliamentary written answer from Treasury Minister Dawn Primarolo.

"It would not be sensible or cost effective to seek further compensation from And-ersen Consulting beyond the amount of £4.1m, which was paid for delays in 1997 and 1998," the statement read.

"I am satisfied that taking action against Andersen Consulting would prejudice the partnership relationship now established between it and the Inland Revenue. This is essential to the delivery of future changes to the system in support of the Government's National Insurance and pensions and welfare reform proposals."

Understandably, Andersen welcomed the announcement. "Working closely with the Inland Revenue and the DSS, we have made tremendous progress and look forward to building on that success in the delivery of future changes to the system," it said in an official statement.

But with the Cabinet Office working on its review of major IT projects, the Government's statement was a frank admission that once key IT functions are outsourced, ministers are in the hands of their service providers.

The Government was, in effect, saying its ability to deliver its legislative programme rests on the cooperation of a private company. Peter Holmes, Andersen's managing partner for government services, would not describe the Government's position quite so bluntly, but he recognises the basic problem.

"The structure of PFI deals means the contractor owns the intellectual property rights to the system and licenses the Government to use the asset. Inevitably that means the balance of power is shifted towards the contractor," he said. "If the Government does not pay the full asset bill, it can't have full control of the asset."

The Government is unlikely to change its views on PFI. It has invested too much political capital in claiming it is the way to finance major public sector projects.

If the Government is to stick with PFI, contracts should be let as business projects with an IT component rather than contracts to supply IT systems in isolation, Holmes said.

The original NIRS contract, according to Andersen, did not take this form. Company insiders say they were contracted to deliver IT with no real control over or involvement in how IT was exploited in the business process.

They say the deal involved a series of tightly defined milestones, which had to be met to avoid penalty payments. Hitting those targets, they claimed, distorted the development of the project as a whole.

The House of Commons Public Accounts Committee, which issued two separate reports on NIRS2, pointed to other problems.

"We were astonished that the [Contributions] Agency and Andersen Consulting did not appear to have a shared understanding of each other's responsibilities under the contract," the committee wrote last July.

If PFI is the future, Holmes argues that new contracts must be about partnership with a clearer focus on achieving business outcomes. "We should be looking at what a project is trying to achieve and not getting distracted about contract terms that spell out a series of stepping stones. We need flexibility to change." However, Holmes added, "This can be very difficult to achieve.

Paul Smith, research director of analysts Kable, agreed that partnerships with suppliers were the way forward but that achieving it was easier said than done.

"The Government has now found itself in the same position as the private sector in relationship to suppliers," said Smith. "When the private sector runs into trouble with an outsourcing it has to choose whether to grin and bear it or sack the contractor."

This is the crux of the ministers' dilemma over NIRS2. The Cabinet Office team reviewing Government IT strategy with input from suppliers' organisation the CSA, is studying the lessons of past failures. Next week it will lay out a new set of good practice guidelines.

But the question remains, when things go wrong, as they sometimes will, does the Government have any clout in putting them right?

The Government's statement was a frank admission that once key IT functions are outsourced, ministers are in the hands of their service providers.

This was last published in March 2000

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