1.21 Under a privately financed contract, best value for money is most likely to be achieved when risks are allocated to the party best able to manage them. Under the terms of this contract, which were initially drafted by BT, risk transfer is more limited than in other privately financed contracts we have examined (Figure 7). The retention of these risks means that elements of the contract are more like a traditional outsourcing contract than a privately financed contract. The Department, therefore, may have missed opportunities for better value for money by not seeking greater transfer of these risks where BT are best able to manage them. The Department believe that all risks considered appropriate for transfer at the time they were developing this project have been transferred to the contractor, and that transferring further risks would have been at a price which would have reduced value for money. The Department's legal advisors, Burges Salmon, were appointed at a late stage and we understand from the Department that they performed effectively. In our opinion, if the Department had involved a legal advisor earlier, which had greater experience of negotiating terms in Private Finance Initiative contracts, this would have enabled the Department to secure better terms, possibly at no extra cost and, therefore, without compromising value for money.
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Figure 7 | Examples of limited risk transfer | ||
This figure gives examples of how risk transfer under the contract is more limited than in other Private Finance Initiative contracts | |||
Risk | Risk transfer on this contract | Comparison with risk transfer on other Private Finance Initiative contracts | |
BT fail to meet performance standards. | Once services are fully migrated, payments to BT will be subject to service credits if BT fail to meet agreed performance standards. However BT's liability to credits is capped at a maximum of between twenty and fifty per cent, depending on the service involved, so that they will still receive some payment in the event of poor performance. In the event of poor performance, however, the Department can suspend payments. | On other Private Finance Initiative contracts the whole of a contractor's fee is at risk if they perform poorly enough. | |
Operating costs are more than expected. | BT can charge the Department extra if, as a direct result of the Department's technical, security or operational requirements, BT incur additional costs in providing the services by a method which is different from their normal method of delivery. Both BT and the Department agree that this will only take effect if the Department directs BT to operate in such a way. | Normally the contractor can only recover increases in their operating costs from a department if these increases are the result of the department changing their requirements. This contract gives BT the possibility of passing on their costs if the method of delivery has changed in meeting the existing requirements. | |
Problems related to the ownership of assets occur. | The Department have sold BT almost all their fixed telecommunications assets but have retained ownership of the UNITER and BOXER systems. BT simply maintain and operate these. | Usually any public assets involved are either sold to the contractor or their ownership is transferred for at least the duration of the Private Finance Initiative contract. | |
BT's prices for services move out of line with market prices. | BT have to reflect other suppliers' prices in the annual price variations. The additional price challenge mechanism can only be used, however, in exceptional circumstances and does not indicate how value for money is to be measured. But the Department conduct periodic benchmarking using consultants, which would provide the basis for any price challenge. | Other Private Finance Initiative contracts set out that prices should be fully benchmarked at periodic intervals against other suppliers' prices and do not restrict this to exceptional circumstances. | |
Source: National Audit Office | |||