Could the £12bn iSoft debacle cost Labour the next election?

One of the critical determinants of the outcome of Britain's next general election will be the competence test. The Tories lost office in 1997 after the party's reputation for managing the economy was placed in jeopardy by the chaotic exit from the exchange rate mechanism. In much the same way, the next election could well be decided on the skill, or lack of it, which Labour has shown in spending taxpayers' money.

Labour's boldest gamble since coming to office has been to splash out on the National Health Service. After the 2001 election, Gordon Brown asked Britain to make a huge sacrifice to modernise the NHS.

On the advice of former NatWest banker Derek Wanless, a 1% surcharge was imposed on employers' and employees' national insurance contributions in the 2003-2004 fiscal year with the aim of raising an extra £8bn in revenue. Of all Labour's tax rises, this was the largest, and it was part of a broader plan to double NHS spending to £89.1bn in the 2007-2008 fiscal year.

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At the core of this project was the NHS's £12bn computer upgrade, widely described as the biggest software contract ever attempted. Its objective was to build an electronic patient record for all 60 million of Britain's citizens, with online prescription and test results services that would link GPs with every hospital in the country.

The Orwellian undertones of such a project aside (it would potentially allow the state to peep into our medical records), it was a launch into cloud cuckoo land. Many GP surgeries already had their own IT systems in place, as have hospitals.

So the NHS project was not simply about putting in new systems (difficult enough), but about bringing together hundreds, if not thousands, of incompatible systems, with data held in many different forms.

The project was so complex that when it went out to tender, the world's largest software consulting group, IBM, deemed it too big and the risk of failure too great. But one firm was not so coy.

The small Manchester-based software firm iSoft, founded by three ambitious former KPMG consultants, Patrick Cryne, Tim Whiston and Roger Dickens, stepped forward. iSoft shares soared on the stockmarket and the three founders sold shares near to their peak, with Cryne alone collecting £14.9m.

It was not just IBM that was doubtful about iSoft's ability to deliver. The CEO of one of Britain's largest software companies has told me that, even for the largest players, the project was too big to contemplate.

Now we know the result. iSoft's much-trumpeted Lorenzo software system, on which the NHS computer project is based, has proved an enormous flop. The combined wisdom of iSoft, consultants Accenture (with more than 1,000 people deployed within the NHS) and a third firm, Computer Sciences Corporation, have failed to prevent iSoft looking over the precipice.

In six devastating months, iSoft issued three profit warnings, revealed a two year delay in delivery of its software package and, worst of all, has become mired in revelations of accounting irregularities and a Financial Services Authority inquiry. Efforts are being made by a new management team, headed by former BAE chief John Weston, to stop the rot.

The latest financial data show that a profit of £2.2m last year has become a £343.8m loss, that the auditors are refusing to sign off the accounts and its survival is now largely in the hands of the banks.

So far, they have only grabbed 3.7% of the equity, but unless Weston and his new team can stabilise revenues and put a figure on the accounting regularities, the firm will effectively be swallowed by its bankers. Hopes of a potential takeover must be taken with a pinch of salt.

This train wreck would be serious enough if it were just a case of wasting outside shareholders' money after the founders cashed in. But it is worse than that; it is the taxpayers' money and the Government's reputation for competence that has been placed at risk.