Findings

6  The Department has achieved a good service delivery on a broad and diverse portfolio of PFI projects.

Across its whole PFI portfolio of more than 50 projects most have reached full service delivery on time, for the cost set out in the contract and are delivering services satisfactorily. These new projects have enabled the Department to achieve considerable benefits from a range of services. Some of the projects are delivering new equipment and training which are contributing to improving the effectiveness of military personnel. Others are providing support services which are helping the Department to carry out its work more efficiently.

7  In the case study projects we examined most of the risks were being well managed by the Department with the projects delivering value for money but there were exceptions. We concluded that in nine out of the ten risk categories we examined there was either a low risk to value for money or moderate risk to value for money (Figure 2). In one risk category, the specification of the asset or service, we concluded there was significant risk to value for money to the procurement phase although not to the subsequent management of the projects in their operational phase. The specification issues had contributed to problems on two procurements: the Armoured Vehicle Training Service project which was cancelled during its procurement and the Defence Animal Centre where the contract will need to be renegotiated. In the other six case study projects we examined the risks had generally been well managed contributing to value for money. The Defence Animal Centre has a capital value of £11 million and is therefore, under current Treasury policy, below the threshold of projects which would now need to be procured under PFI. Since these deals the Department has taken a number of steps to address the risk of inadequate specification of assets or services (Figure 3).

8  The Department has developed commercial disciplines for scrutinising the value for money of its PFI procurements and has extended these into other projects. The Department has over time developed appropriate processes for scrutinising PFI procurements. The Department has an experienced Private Finance Unit which provides support and guidance to PFI projects. Large PFI projects also need to satisfy the Department's Investment Approvals Board. Recently the Department has used its PFI experience to establish a further review process for its large projects under all forms of procurement. The new review process draws on the checking, known as due diligence, which the private sector funders carry out on PFI deals. It aims to improve assurance that the proposed commercial arrangements will enable the project to meet operational requirements with appropriate contract terms.

9  The Department is using these disciplines to take tough decisions on some PFI projects although these decisions could have been made on a more timely basis. Although most of the Department's PFI projects have delivered the services required the Department is prepared to take decisions to abandon inappropriate PFI project proposals or to renegotiate or terminate PFI contracts which are not delivering the required services. These decisions are taken in the interests of achieving value for money, but in some cases the Department has taken a long time to decide on the appropriate action. For example, the Department took the right decision not to proceed with a proposed PFI procurement for Armoured Vehicle Training but only after spending six years in developing the project. The Department is rightly seeking to renegotiate its Defence Animal Centre contract but has also taken six years to reach this position despite ongoing dissatisfaction with the service delivery.

10  The Department took on average 37 months to procure the projects we surveyed, where data was available, but large projects often took longer. The Department's methods for overseeing PFI procurements aim to avoid inappropriate deals being completed. It is right that time is spent on undertaking such assessment. But it is also important that procurements are efficient so that service delivery is not unduly delayed and bid costs, which are likely to be factored into contract prices in the long term, are kept within reasonable limits. The average procurement time in the Department's PFI projects we surveyed, in the 77 per cent of projects where the Department held such data, was 37 months. These statistics compare with the average PFI experience across government of 34 months in a 2006 NAO survey (Improving the PFI Tendering Process HC 149 2006-07). Larger projects often took longer to procure, the average for the Department's PFI projects with a capital value of over £50 million, where data was available, being 45 months. This longer time reflects: the special requirements of the Department's projects compared with repeat projects such as hospitals or schools; the range of the Department's in-house stakeholders who are involved in decisions about the projects and the assessment of the deals; and some scope, despite these special considerations, for the Department to improve the speed at which it closes larger deals, which it is seeking to do through improvements to the oversight of its capital procurements.

11  The Department's efforts to allocate and manage risk at the outset of the projects that we examined were often hampered by a lack of data on the services required. Lack of data represented a significant risk to value for money in the eight case study projects we examined. Insufficient service information creates a risk because the Department may not get the service which matches its needs or the contractors may increase the pricing of deals because of the resulting uncertainty. Procurement times have also been affected by the need to clarify specification issues. In particular lack of data on the Department's service requirements was a factor in the cancelled Armoured Vehicles Training PFI project. Some issues, which could have been identified earlier, only emerged after contract letting. For example, in the Field Electrical Power Generators project the Department had to pay the contractor £7.3 million without competition to modify the generators when the Department found that some of its vehicles, when pulling the generators, had manoeuvrability problems and could not turn corners safely.

12  The Department's PFI contracts have flexibility to deal with changes but there are risks to maintaining value for money where changes are required. The Department works in a fast changing, often unpredictable, environment. It often finds that changes are needed to its projects either in the run-up to contract letting or once the project is in service because:

■  the operational needs of its military staff may change, particularly if they need to be deployed in new territories;

■  new technology used in equipment or training may be developed; or

■  in some cases, changes are needed because the Department's needs are initially difficult to define precisely across its large complex organisation.

Any change after appointing a contractor creates a risk to value for money as it may involve added costs in a situation where competition is absent. The NAO report Making Operational Changes in PFI Projects (HC 205, 2007-08) analysed the risks arising from contract changes, and described how Departments and agencies can best manage these risks. The capacity for the Department's needs to change, sometimes at short notice, does not mean that the PFI is an inappropriate form of procurement: well-designed PFI contracts are flexible and can adapt the services provided as circumstances change. It does mean that changes, and the pricing of them, have to be carefully negotiated between the Department and their contractors.

13  There are instances where contract management could be improved, especially in assessing performance. The Department's PFI projects in service are managed by teams who are generally addressing contract management issues in an appropriate manner and building effective working relationships with their contractors. The Department's Private Finance Unit has also already made a useful step in evaluating the Department's overall experience of using PFI through its 2005 review of the operational experience of its PFI projects. Our examination has, however, identified the following areas for improving project management:

■  User satisfaction feedback had not been obtained in 25 per cent of the projects in our census.

■  Risk management processes such as risk registers were not used consistently.

■  In some projects post contract evaluations, to consider the costs and efficiency of the procurements, were either not carried out or were not done on a timely basis.

■  In the Defence Fixed Telecommunications project, the Department had to recover £1.3 million from the supplier BT after it became apparent that employees of BT had inflated the number of calls being answered within the required time limit by calling each other. This fraud was not detected initially because there was no adverse consequence for the Department's staff using the telecommunications services. The Department and BT have taken steps to address the circumstances which led to this fraud. The Department and BT have now imposed a new management structure and governance arrangements on the contract. There is more detailed performance reporting by BT which is subject to audit by the Department. BT has also made changes to the staffing of the project.

14  Appropriate skills are required for managing PFI contracts so that value for money is not eroded during the contract's life. There is a particular need for the knowledge of the contract and the aims of the project to be transferred to those who will manage the contract. There was a lack of staff continuity on some of the case study projects we examined, but other case study projects had benefited from retaining at least one member of the contract negotiation team in post for the first year or two of the operational phase.