Q1 Chairman: Good afternoon and welcome to the Committee of Public Accounts. We are today discussing the Government Communications Headquarters (GCHQ) and their new accommodation programme. We are joined from the Cabinet Office by Sir David Omand who is the Permanent Secretary for Security and Intelligence, and from GCHQ by Dr David Pepper, who is the Director of GCHQ. Could I start with you, Dr Pepper? Could you turn to page 14 of the Comptroller & Auditor General's Report, paragraph 3.15? If you look at that paragraph you will see that the PFI deal increased by 21% after you had appointed the preferred bidder. Why could you not contain these costs?
Dr Pepper: Quite a lot of that increase was foreseen at the time that the bids were accepted. The bids as they were received, in what was called the BAFO, were identified as being non-compliant in a number of ways. The team recognised that they would need to do quite a lot to bring them up to spec. Once that had been done it was necessary to take account of the fact that our staff numbers had increased. In fact, all but about 9% of that increase was priced as a result of information obtained during the competition. The increase beyond the competition was only that which resulted from the increase in staff numbers, the consequent increases in services to the slightly bigger building, inflation as a result of the fact that the deal was taking slightly longer to bring to fruition and an increase in finance costs because of the way the bond market worked.
Q2 Chairman: Was it prudent then to accept the original bid from IAS so readily? Perhaps you should have allowed yourself more time to negotiate.
Dr Pepper: It is always a matter of judgment in these circumstances when you draw the competition to a close. We had the original four bids and because they were not good enough we added an extra stage of competition with just two bidders. The result of those two bids was still not bids that were absolutely complete, but we had reached a situation where we could clearly see that the IAS bid was going to be completable and the other bidder, Oakley, was so far behind in the competition in terms of both quality and price that there was no realistic prospect of their ever getting to the point of being the winner. Therefore, although in one sense it would have been nice to keep the competition going, we had to act responsibly in terms of how much effort we were requiring the private sector to put in at a point where we already knew who the winner was going to be. It was felt that we had reached the point where the right balance was to go for the single bidder but we were able to continue driving value for money out partly because we had a lot of information from what had been priced as options during the competition, and during the rest of the time we benchmarked further bid information and we used two private sector firms to provide assurance that the additional bids that we were getting were not extortionate and we were getting good value for money.
Q3 Chairman: Can you now please look at page 18, paragraph 4.7 of the Report where you will see that the original 1997 estimate for technical transition increased 10-fold to £450 million. Why did your technical people not realise earlier on the need to change so much of this equipment?
Dr Pepper: To put ourselves in the situation of what was happening at the time, if you were to go back to 1990 or thereabouts, our IT at that stage was essentially composed of a number of stand-alone systems, large systems but they were not interconnected and they were not networked because at that stage networking was not the way IT was organised. During the early 1990s we began gradually to introduce networking to our systems for two reasons: one, because that was the way technology was going, but also because we faced a change of circumstances in that we had an IT system which had evolved during the Cold War when we had very large, monolithic, essentially static targets and we were able to operate in effect with stove-piped IT systems. During the early 1990s the Cold War ended; we were faced with a much more volatile and varied set of targets and it became necessary to make our systems much more flexible and to make the way we used them more flexible. During the early 1990s we started to introduce networking. By the time we got to 1995-96 we had reached a stage where there were a lot of networking connections between the systems. For reasons that with hindsight are perhaps hard to understand, at the time the engineers who were doing the initial estimates of what it would cost to do the transition between the buildings simply did not spot the fact that the growing degree of networking was going to complicate enormously the process of doing the technical transition. You can see if you look back, as you will know from the Report, that the immediate predecessor plan to the new building was for a new computer hall. That move would have raised all the same problems as the move to the new building eventually proved to do, but again the planning for that was being done on a simple box-move basis, moving systems one by one. That planning was carried over into the new building and it took some time before anybody stood back (and this was only done during the planning for the millennium) and said, "Just a minute. It is not going to work like that because of the degree of networking". I do not attempt to excuse what happened; it clearly should not have done, but I think there is a rational explanation of why we got historically to where we were. We were in a period of transition of our IT systems and failed to spot the situation.
Q4 Chairman: Thank you for that. Can you please turn to page 26 and look at paragraph 5.25 where we read that the technical transition over the first five years will also require some 978 man years of your own in-house staff effort. How much extra will this cost?
Dr Pepper: It is not extra. It is using the manpower we have got. The cost of 978 man years would be somewhere between £30 million and £40 million if you just costed it on the capitation rates, but that is not extra effort that we are bringing in. That is using the manpower we have got for this purpose.
Q5 Chairman: It is still nearly a 1,000 man years of your own in-house staff effort.
Dr Pepper: Indeed.
Q6 Chairman: And you are satisfied that that is a containable cost, are you? You have a foreseeable plan, do you?
Dr Pepper: We have contained it, we are containing it and we are living within it.
Q7 Chairman: And you have enough resources to accomplish this?
Dr Pepper: Yes.
Q8 Chairman: Will you go back please to page 18 and look at paragraph 4.9? You will see there that to keep some of the technical transition costs down some of the existing buildings at Oakley will be kept open until 2012. Is that right?
Dr Pepper: That is right.
Q9 Chairman: I thought the whole point of this was that you were supposed to move into one site. That is why we are paying this huge amount of money. Is this not a false economy, leaving Oakley open until 2012?
Dr Pepper: No, because the great benefit of being on one site is having all our people under one roof and working together. The number of people left behind on Oakley to run the IT will be very small. Certainly within a few years it will be down to about 200 and they are essentially the people who are running the IT. The great majority, 90%-odd of the 4,500 people, will be working in the one building which will provide us with all the opportunities to do the teamwork we want. Ideally we would like to close Oakley, and we will in due course close Oakley, but the reduction in benefit as a result of keeping Oakley open is very small.
Q10 Chairman: Okay. If you look at page 19, paragraphs 4.17-4.19, they make reference, do they not, to Lieutenant General Burton's report? Why did you not recognise earlier that this should have been managed as an integrated project?
Dr Pepper: When we started we were focusing very much on the feasibility, both practical and commercial, of building this new building and getting everybody under one roof. It would, I think, at that very early stage, have been too early to give any sensible amount of thought to the softer aspects of the move. Very clearly, we should have integrated the technical transition into the overall programme. Why did we not? Essentially because, if you think back to what I said a few minutes ago, we were operating under the belief that the technical transition was going to be relatively straightforward. We knew there would be a lot of moves but we saw no particular difficulty around doing them, so the board and the project team gave all their attention to what for us was completely novel territory, first, PFI and, secondly, moving everyone into one building. That was where all the difficulties were thought to lie, so that was where the attention was given. Clearly, with hindsight, that was a mistake but, thinking back to the way we were at the time, that was where we felt the genuine management attention was needed.