Sir John Bourn, head of the National Audit Office, told Parliament today that the Private Finance Initiative deal for the new British Embassy in Berlin is likely to provide a suitable building at a price slightly lower than a comparable conventional procurement.
The contract provides for the construction of a new Embassy building and its operation for 30 years and is extendable by re-tender for a further 30 years. The FCO payments will average £4.5 million a year for 30 years, amounting to a discounted net present cost of £49.8 million.
The new Embassy is the first and so far only PFI accommodation project undertaken by the Foreign and Commonwealth Office (FCO) and is one of the few overseas PFI projects. The FCO faced a number of difficulties in the procurement process but managed the competition to choose a supplier very effectively. They succeeded in obtaining three final bids from quality consortia, and chose the best and lowest priced bid. The FCO also succeeded in ensuring that the overall estimated cost of the deal did not change significantly between the appointment of the preferred bidder and financial close. And, the FCO achieved a notable success in ensuring that all of the payment is at risk under the contract, passed over those construction risks which are usually transferred to a consortium in PFI projects and instituted a performance payments regime which transfers a good deal of performance risk to the consortium.
This was a novel form of procurement abroad undertaken at a time when all parties were learning about the complexities of PFI. Despite delays, largely caused by the need to take account of new Berlin City building regulations, the project delivered a suitable building, fit for the FCO’s purpose, in June 2000.
When letting the contract the FCO estimated that there was a small price advantage of £1 million in the PFI deal compared with the cost of a conventional procurement. This view was based on a broad judgement of the estimated total costs of the PFI and the conventional project. The FCO examined the impact which varying levels of operating costs, risks, and the future exchange rate between Sterling and the German mark would have on the assessment.
The contract allocated risks appropriately in most key areas. Although the non-financial benefits of this project are likely to be similar to those which would have been obtained if the building had been built with conventional finance, there may be sound reasons for this. Because bidders adopted the design which had already been developed by the architects, the scope for proposing design innovations was limited. And the need for the FCO to take account of security requirements meant possibilities for innovation in design were constrained. The FCO have nevertheless managed to achieve some innovation in the construction phase.
The report makes a number of recommendations aimed at improving future PFI construction projects.
- Departments should look to include provisions in contracts which ensure that all of the payment due to the consortium is at risk (as the FCO have done).
- Departments should find out from bidders the identities of all the parties to their bids so that they can take an early view on whether conflicts of interest exist. In this case, the FCO were not aware that a German subsidiary of Johnson Controls had played a part in two of the three short-listed bids. The NAO found no evidence, however, that this had weakened the competition in any way.
- Departments should recognise that where they want bidders to demonstrate greater innovation it is more likely that this will be achieved by asking bidders to produce their own designs. But in the case of the Berlin Embassy the design had to take account of a complex brief, local planning regulations and security requirements.
- Departments should put themselves in a position to identify the reasons for major differences between the bids and the Public Sector Comparator, both in overall terms and in difference elements such as construction and operating costs. Focusing mainly on total cost comparisons, the FCO followed this as far as they could in the case of the Berlin Embassy.