Paragraphs 2.12 to 2.14, and Figure 8

9  Both final bids complied with the Department's quality and technical criteria, and the Department estimated that BT's final bid was £121 million (expressed in present values) less costly than the other final bid from Racal. BT's final bid also produced non-financial efficiencies and innovations compared to the previous form of service delivery.

10  Bids from GPT and Nortel on the basis of public finance initially appeared to offer more savings than the two privately financed bids from BT and Racal. GPT's bid initially offered £48 million more savings than the BT bid, but the Department reduced this estimate of additional savings to £12 million after adjusting aspects of the GPT bid which did not meet the specification. The Department nevertheless rejected GPT's bid, because they considered it was not technically feasible.

11  The Nortel bid was assessed to be technically feasible despite some technical non-compliances. This bid initially offered £27 million more savings than BT's. After adjusting for aspects which did not meet the specification, the Department estimated, however, that it would be £26 million more expensive than BT's bid, but still £30 million cheaper than Racal's bid over a ten year period. Although the Department chose a ten year contract period, and Nortel had offered substantially greater savings than Racal over this timescale, the Department did not invite Nortel to participate in the final bidding rounds. They decided to have only two final bidders, were keen to pursue a privately financed solution and considered that the Racal bid would offer more credible competition to BT with fewer technical non-compliances than Nortel's bid. Racal's bid would also have offered greater savings over a 15 year period.

Paragraphs 2.6 to 2.9 and 4.7

12   The Department followed a procedure which limited bidder negotiations until they selected a preferred bidder. We consider that this contributed to the need for bidders to put in three Best and Final Offers rather than the preferable one, thereby increasing the length of the competition and increasing costs to bidders. There was an awareness within the Department and in the private finance market at that time that the European Union negotiated procedure was appropriate for privately financed deals although the Department's project team told us they had not been advised to follow this procedure. In our view, better external advice may have led to the Department following the negotiated procedure.

Paragraphs 2.3 to 2.5, 2.29, 2.32 to 2.34, and 2.37 to 2.44, and Figure 11

13  The Department did well to sustain competition between BT and other suppliers. BT had advantages in the competition because they already provided much of the Department's fixed telecommunications requirements, so they had a greater knowledge of the Department's requirements than any other supplier. The Department maintained competitive pressure until selection of preferred bidder and secured a late reduction in the final bid from BT which reduced the total project costs by some £60 million (discounted).

14  The expected payments to BT rose, however, by £77 million as a result of negotiations after they became preferred bidder. This was largely a result of BT agreeing to provide additional services and to advance the date for taking over responsibility for some services. There were, therefore, compensating reductions of £40 million to costs which the Department would otherwise have borne directly. This resulted in a net increase to the overall project costs as a result of the negotiations of £37 million. The Department's ongoing cost reduction programmes had reduced other telecommunications costs which they would bear directly by £35 million. As a result their estimate of the total project cost increased at this time by £2 million. The Department consider that their negotiations with BT provided a small improvement in value for money as around 90 per cent of the additional payments to BT were for additional services purchased at tariffs determined in the competition and there was also a cost reduction for UNITER, a secure system.

15  We have carried out benchmarking which has confirmed that the prices of services are generally reasonable. The Department are paying around the same amount for two high security services as they were before the contract, despite the fact that these are now being provided by cheaper civilian staff. BT are now responsible for maintenance risks and for replacing obsolescent equipment. While this may explain the difference we consider the Department should have quantified this risk transfer to demonstrate whether the price paid was value for money.