1 The Ministry of Defence (the Department) undertakes a wide range of activities, including front line military capability and essential support functions. To deliver these activities efficiently, the Department uses various forms of relationship with the private sector, with differing approaches to sharing risk. The Private Finance Initiative (PFI) represents one important form of relationship. In PFI projects the Department usually defines the outputs it requires and invites the private sector to design and deliver the required service outputs for an agreed annual price.
2 Risk management is important to all forms of procurement undertaken by the Department. Effective risk allocation and management is particularly important to delivering value for money in PFI contracts. These contracts seek to optimise value for money by agreeing an allocation of risks between the public and private sectors over the course of a long-term contract. This is not the sole contributor to value for money but it is very unlikely that the best possible PFI outcome will be achieved without effective risk allocation and management.
3 This study examines whether there has been effective allocation and management of risk in the Department's PFI projects. Our findings are based on a detailed examination of eight PFI case study projects. This analysis is supported by a census of all the Department's PFI contracts let in 2007 and consultation with the Department's staff, contractors and advisers. We selected the case studies to reflect the diverse nature of the Department's PFI portfolio (Figure 1). Appendix 1 contains detailed findings from each case study. Our examination has also drawn on our previous experience of examining risk management in PFI projects (see Methodology, Appendix 2).
1 | The eight case study projects | |||||
The case study projects, other than the cancelled Armoured Vehicle Training Service PFI project, were selected to present a range of the Department's PFI projects in full service in 2007. | ||||||
| Project | Year contract let | Year full service commenced | Capital Value | Type | Description |
| Heavy Equipment Transporter (HET) | 2001 | 2004 | 65 | Equipment | Service to move battle tanks and other heavy equipment during peacetime and on operations. |
| Field Electrical Power Supplies (FEPS) | 2002 | 2005 | 73 | Equipment | Provision of 1347 generator sets to support operational electrical requirements in the field. |
| Medium Support Helicopter Aircrew Training Facility (MSHATF) | 1997 | 2001 | 114 | Training | Helicopter training facilities for chinook Mk 2/2A, Merlin Mk III and Puma Mk 1 aircraft. Training includes initial conversion to type, continuation, pre-deployment and mission rehearsal. |
| Armoured Vehicle Training Service (AVTS) | contract not let as procurement was not completed | Services to be provided under other contracting arrangements | N/A | Training | Provision of live and synthetic training of gunnery and specialist driving for Armoured Fighting Vehicles. To provide crew training for a wide range of Armoured Fighting Vehicles, including challenger II tanks, Warrior Infantry Fighting Vehicles and Combat Reconnaissance vehicles. |
| Main Building Refurbishment (MBR) | 2000 | 2004 | 439 | Accommodation | Development and refurbishment of the main Ministry of Defence building in Whitehall and temporary accommodation to other buildings, as well as upkeep of the Old War Office building. |
| Defence Animal Centre (DAC) | 2000 | 2002 | 11 | Accommodation | Redevelopment of new office and residential accommodation, animal husbandry and training support. |
| Defence Fixed Telecommunications System (DFTS) | 1997 | 2000 | 200 | Other Support | Provision of secure and survivable Wide Area Network voice, data and video telecommunication services across the Ministry of Defence to users (Ministry of Defence staff and in some cases its contractors) based in the United Kingdom and Overseas. |
| Tidworth Water and Sewerage | 1998 | 1998 | Nil | Other Support | Provision of fresh water and sewerage services in Tidworth Garrison. |
| Total capital value |
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| 902 |
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| Source: National Audit Office review of case studies | |||||
4 Our analysis of these projects focussed on ten key risks. In doing so we recognised two important features of the Department's portfolio of PFI contracts. Firstly, the Department's approach to procuring PFI deals has developed over time. Our case study projects were relatively early contracts entered into between 1997 and 2002. These were chosen to provide a good level of operational experience to examine. Since these contracts were let the Department has achieved a greater standardisation of contractual terms and conditions. It has also improved its internal scrutiny of PFI deals and all large projects in the light of previous experiences. Secondly, we recognise that the Department has faced particular challenges arising from the fact that its PFI portfolio is less homogenous than those of other departments.
5 The Department's portfolio of more than 50 PFI projects represents a small, but important, part of the Department's annual spending. The total private sector capital investment in Defence is over £9 billion. In 2007-08 the Department spent £1.3 billion in PFI service charges. The projects range from small projects with a capital value of under £50 million to larger projects with a capital value of over £1 billion. The larger projects include the service accommodation contract Allenby and Connaught let in March 2006 (capital value £1.3 billion, total contract value £8 billion) and the Future Strategic Tanker Aircraft, the Department's largest PFI deal completed in March 2008 (capital value £2.6 billion, total contract value £13 billion). The capital value of the case study projects we examined, focussing on projects in full service in 2007, was just over £900 million (Figure 1, page 5)