PART TWO Managing risks

This part of the report analyses the risks that the Department's PFI projects may face in successfully delivering projects both in procurement and the in-service phase.

2.1 Previous National Audit Office reports on PFI projects have established that the appropriate allocation of contractual risks during the procurement phase and the effective management of those risks during the operational phase are key aspects of obtaining value for money.

2.2 We examined the eight case study projects for ten key risks to the delivery of the PFI service for the end user (Figure 9). The risks may relate to both the procurement and contract management of the project.

2.3 We have assessed our findings in relation to the risks to value for money of the eight case study projects using the classification set out in Figure 10. Value for money is a comparison with other forms of procurement and with the best possible PFI outcome taking into account the deal as a whole and the particular features of the project. This is consistent with Treasury guidance on assessing the value for money of PFI deals.

2.4 A summary of our assessment of risk performance for the eight case studies is included as Figure 18 on page 46 and 47. We concluded that in nine out of ten risk categories we examined there was either a low or moderate level of risk to value for money. 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. The Defence Animal Centre has a capital value of £11 million and is therefore, under current Treasury policy, below the value threshold of projects which would now 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, page 7). In the other six of the eight case study projects we examined the risks had generally been well managed with value for money being delivered for the taxpayer. Our detailed findings on each of the risks is set out starting at page 24.

9	Ten key risks to project delivery
	Type of risk	Risk category	Definition of risk
	Design and delivery of the project	1. Specification of the asset or service	Failure to adequately specify the asset or the service to be performed so that the service does not correctly match the need and demands of users.
		2. Delivery of a PFI solution	Failure to deliver a PFI solution in the procurement phase or, after a contract has been let, failure to deliver the implementation of the required service in terms of the specification, the contractual timescales or the expected Department budget.
	Delivery of the service throughout the lifetime of the contract	3. Delivery of the ongoing service	Failure to deliver the service to the required standards as set out in the contract.
		4. Service user and stakeholder satisfaction with delivery	Users are not satisfied, or satisfaction is not assessed in order to ensure that value for money is being achieved from a user perspective.
		5. Technology and Latent Defects	The technology being used to provide the asset or service may not be fit for purpose throughout the life of the contract, due to inadequate design, or unexpected use or misuse by the user.
		6. Environment and Safety	Security of physical assets and information may be compromised by inadequate project design or management. Expected or unexpected environmental issues (such as military contamination like fuel spillages or contamination from the use of certain weapons) may affect the safe and effective delivery of the service.
	Contract management processes	7. Performance monitoring and management regimes	Inadequate contract performance mechanisms may not provide sufficient incentive to the contractor to deliver the service specified in the contract.
		8. Relationships with contractors	Poor relationships between the contractor and the public sector can impact the service being delivered and thereby reduce value for money.
		9. Resources and skills	Insufficient resources, including human resources (staff capacity, skills, recruitment and retention) or inadequate financial capacity to manage or procure the contract effectively.
		10. Risk management processes	Failure to put in place robust systems to monitor and manage ongoing risks to the delivery of the service.
Source: National Audit Office

10	Classification of risk level based on the evidence from the case study projects
	Red means that there is a significant risk to value for money from this aspect of these projects.
	Amber means that there is a moderate level of risk - there are some risks to value for money from this aspect of these projects.
	Green means that there is currently a low risk to value for money from this aspect of these projects.
Source: National Audit Office

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