5 The LTPA was in part established to address the legacy of underinvestment in the assets used in the delivery of test and evaluation services. To this end the contract is based on there being £136 million of capital and rationalisation expenditure in the first five years. QinetiQ receives funding for the depreciation of this capital expenditure through the contract. The expected profile of this capital expenditure was set out in the financial model, which anticipated that the majority would be spent in the early years to deliver the investment required to achieve the cost savings envisaged within the contract.
6 The financial model assumed that all capital expenditure was funded through the cash flows of the contract even though the contract allows QinetiQ to fund this investment through raising debt, which can be repaid over a longer period. The impact of funding the capital expenditure from contractual cash flows is to reduce the value of those cash flows significantly in the early years of the contract; this has a large impact on the present value of the financial model, which was used as the basis for agreeing the £30 million reduction.