Press Release - The Private Finance Initiative: The Contract
for the Defence Fixed Telecommunications System
23 March 2000
The Ministry of Defence achieved a good price when they awarded
the contract for a new Defence Fixed Telecommunication System to BT
in 1997, Sir John Bourn, head of the National Audit Office, told
Parliament today. The ten year contract let under the Private
Finance Initiative (PFI) is expected to cost £612 million with a
further £170 million of related expenditure within the
Department.
The Department's main aims in letting this contract were to
rationalise and improve the efficiency of their existing services
and to ensure continued service delivery. The Department estimate
that the contract will enable them to achieve savings of around £30
million a year (some 20% of their annual fixed telecommunications
costs).
The National Audit Office found that:
- the Department obtained the contract at a good
price. The contract was let under competition and BT’s
final bid was estimated to be £121 million less costly than the
other final bid from Racal. BT’s final bid also produced
non-financial efficiencies and innovations compared to the previous
form of service delivery. Although BT’s price rose by £77 million
during the subsequent negotiations this was largely a result of BT
agreeing to provide additional services and to advance the date for
taking over some services. The Department were able to reduce other
costs associated with the project which largely offset the price
increase;
- the scope of the project may not, however, have
maximised value for money. There are interrelationships
between the Department’s various communication systems and rapidly
changing technology requires fast and frequent reassessment of the
most effective form of service delivery. But, having decided to
procure a new fixed telecommunications system, the Department did
not assess the potential advantages and disadvantages of expanding
or reducing the scope of the project. The Department say they
wanted to avoid delays in achieving savings. A strategic review of
the project scope would, however, have helped them to balance this
against both the risks and possible further savings from a project
with a different scope; and
- the Department are generally protected by the contract
but should have made better use of external advice. BT is
paid for providing the existing service and for transferring
service delivery to BT systems in stages by specified dates up to
July 2000. The contract also allows for new services and technology
to be incorporated during the contract period and prices for
services are adjusted periodically in line with movements in agreed
price indices. But the effectiveness of the mechanism which allows
the Department to challenge prices may be limited and the
performance standards and compensation arrangements for poor
performance, although considered adequate by the Department, are,
in many respects, not as stringent as those applied in other large
privately financed and telecommunications contracts. Also some
price elements, such as labour, which are likely to increase, are
subject to quarterly adjustments whereas prices for
telecommunication services, which are expected to fall, are
adjusted annually. The Department negotiated certain aspects of the
contract based on terms initially proposed by BT using in-house
staff without the benefit of external legal advice. The
Department’s interests could have been better protected if they had
brought their legal team together at the outset, after a
competition between firms with relevant experience, and if they had
sought bids based on a set of contract terms developed with input
from their legal advisors.
Key learning points
The National Audit Office identified a number of key learning
points for future projects, a number of which are now reflected in
guidance from the Department:
- where there are interrelationships and potential synergies
between different services departments should appraise their
strategy for delivering all such services before developing a
long-term project for any of them;
- even where departments have in-house staff with expertise in
traditional forms of procurement they should still consider what
additional skills external advisors can contribute to a privately
financed project; and
- departments should ask contractors to price their bids on a set
of contract terms developed by the departments and their advisors,
making use of the Treasury’s new guidance on contract terms.
Sir John Bourn said:
"This project was a major procurement for the MOD in the
complex field of communications where the MOD has many different
requirements and technology is changing rapidly. The MOD achieved a
good price on the project they went to the market for but, given
that the MOD has a number of closely related communications
contracts, a strategic review may have identified options for
pursuing further savings from a project with a different
scope."
Notes for Editors
Press notices and reports are available from the date of
publication on the NAO website at http://www.nao.org.uk/ Hard copies can
be obtained from The Stationery Office on 0845 702 3474.
The Comptroller and Auditor General, Sir John Bourn, is the head
of the National Audit Office employing some 750 staff. He and the
NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 19/00
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