29. The PFI deal that MOD has entered into is for 30 years. Modus must redevelop Main Building and provide maintenance and facilities management services at Main Building and the Old War Office until May 2030.32 MOD is tied to Modus for this period unless the quality of service provided by Modus is so poor that MOD would be permitted to terminate the contract. Departments face potential risks from such long term arrangements: the contract might not be sufficiently flexible to allow changes to the department's requirements to be accommodated; where changes are made it might be difficult in the absence of competition to demonstrate that the changes are value for money; or the contractor may perform to below the standard required by the department but not significantly enough to allow the department to terminate the contract.
30. MOD considers there are benefits from the long term deal it has entered into which offset the potential risks of a long term arrangement:
• Price certainty
The contract defines the annual unitary charge payable by MOD to Modus. MOD expects this to provide greater price certainty throughout the 30-year contract period than would be possible under alternative arrangements.33
• The contract allows flexibility for MOD to reduce staff numbers in Main Building If MOD chooses to vacate a whole floor of Main Building its payments to Modus will be reduced. Modus may then sub-let the vacant floor but for security reasons MOD can veto incoming tenants. MOD sees its ability to vacate floors and to thereby reduce its payments any time during the 3 0-year contract as an important benefit. It is currently planning to reduce its Head Office staff numbers to 4,300 (Figure 4) but does not consider this to be a fixed figure. Although it does not expect to be able to leave London completely it will continue to bear down on Head Office costs. It therefore believes that it needs downwards flexibility in its accommodation requirements and has secured this in this contract.34
• Payments linked to services in the long term
MOD's payments to Modus will be linked to the delivery of services at specified qualities and Modus is required by the contract to provide the same level of service in the final years of the 30-year contract as in the early years. Modus is also responsible for the design, build, maintenance, and operation of Main Building, and MOD expects both factors to incentivise Modus to provide high quality infrastructure throughout the 3 0-year period. If the building were not satisfactory Modus would have to rectify the problem and might face penalty charges.35
Figure 4: Planned changes to MOD Head Office staff numbers in London
| 1 April 1999 | By 30 Nov 2004 | % Change |
Main Building | 2,623 | 3,300 | +26% |
Other buildings (6 at 1 April 1999; 1-Old War Office-by 30 November 2004) | 3,397 | 1,000 | -71% |
| 6,020 | 4,300 | -29% |
Source: Ministry of Defence
31. Despite MOD's plans to reduce staff numbers it identified in April 2000, a month before the contract was signed, that a further 500 non Head Office staff needed to remain in London and would need accommodation after 2002. In January 2001 MOD approved a separate contract for the refurbishment of St. George's Court to accommodate these staff. MOD considers it will be cheaper to use St George's Court than to accommodate the extra staff in Main Building, as that would have required additional work with too much risk and cost. For security reasons MOD also values having an additional central London building available separate from Main Building.36
32. Modus will provide IT infrastructure in the redeveloped Main Building, whilst MOD will provide the IT systems. MOD decided to exclude IT systems from the deal as its systems requirements evolve continually and could not be predetermined in the same way as its space requirement. It did not know what configuration it would require in 2004 on reoccupation of Main Building. The configuration would need to be linked to MOD's defence information infrastructure which is being developed separately. In the short term, MOD has contracted with third party suppliers for the relocation of systems to the decant buildings being used whilst Main Building is being redeveloped. When developing the PFI deal MOD had not known how many systems would need to be moved. There were around 200 different systems which were owned by various MOD agencies. Some had become time expired and MOD did not know if they would need to be replaced. In the event only 90 systems had to moved into the decant buildings.
33. MOD did not consider that committing itself to deals which ran for 30 years would constrain its ability to be flexible in managing the defence budget in future. Commitments involving £2 billion of private finance had been entered into with a further £12 billion of private finance commitments being considered. If all these projects went forward, 8% of the defence budget would be committed to private finance arrangements. MOD considers the PFI arrangements it has entered into represent best value for money for delivering the services it needs to run the Armed Forces world wide and to execute defence policy.37
_____________________________________________________________________________________________________
32 C&AG's Report, para 3
33 Q 2
34 C&AG's Report, para 1.16; Qq 4, 129, 133-137, 151-157, 204-207
35 Q 2
36 C&AG's Report, paras 1.21-1.22; Qq 4, 41-43, 130, 135, 212-213