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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.

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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.

"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."

Sir John Bourn

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