2.29 The Department revised their investment appraisals at each of the three Best and Final Offer stages to reflect the latest bid price changes. Each of these showed that BT's bid prices were lower than Racal's. At the third Best and Final Offer stage, both BT's and Racal's bids fully complied with the Department's quality and technical criteria, and the Department decided to select their preferred bidder on price alone. The Department estimated that, in present values, the BT bid would cost £44 million less than, and the Racal bid £77 million more than, the Zero Option. The BT bid was thus £121 million cheaper than the second placed bid. The increased price differential between BT and Racal following the final rounds of bidding reflected the fact that, although Racal had improved their bid by £30 million, BT had offered a greater improvement of £60 million in their third Best and Final Offer. There were also other pricing changes by both final bidders in response to the Department's amendments to their specification.
The Department's assessment of the third Best and Final Offers against the Zero Option |
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Figure 10 |
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| The figure shows that the BT bid cost £44 million, (present value) less than the Zero Option, and the Racal bid cost £77 million more over ten years. | ||||
| Investment appraisal value (£ million, discounted) | BT | Racal | Zero Option | |
| Costs over ten years | 11591 | 12801 | 12031 | |
| Savings over ten years | 44 | (77) | 0 | |
| Note: 1. These figures represent the total costs of the Department's fixed telecommunications, including elements which are not part of this project. These comprise the contract cost, plus residual costs to the Department, plus one-off equipment costs and estimates of risks remaining under each of the bids. For the BT bid these were £594 million contract cost, £428 million residual costs, £131 million one-off equipment costs and £6 million risks (all present values). They are not directly comparable with the signed contract figure of £782 million quoted in paragraph 3, which represents only the cost of this project, including residual costs to the Department. | ||||
Source: Ministry of Defence |
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2.30 The Department also undertook sensitivity tests to estimate the impacts of:
■ different economic assumptions; both more and less favourable than the central case assumptions. These examined the impact of different rates of labour, service and equipment cost growth; and
■ higher and lower rates of growth in demand by the Department for data telecommunications services.
The sensitivity tests considered a reasonable range of alternative conditions and showed that in all cases the BT bid continued to offer better value for money than the alternatives. Detailed results of the sensitivity tests are given in Appendix 4. Following these tests the Department selected BT as the preferred bidder in November 1996.
2.31 Many Private Finance Initiative projects are carried out by private sector firms establishing free-standing special purpose vehicles. Both the BT and Racal bids assumed, however, that they would finance the project out of their existing resources. This has the potential to reduce financing and bidding costs but the possible disadvantage that the project has not been subject to a high level of detailed scrutiny by external financiers. If there is the risk that the project may not be robust, this may not be picked up, which may lead to possible service problems. We have not been able to establish the extent to which BT and the Department have benefited from BT's financing arrangements. BT were not required to disclose their expected rate of return on the project so we have not been able to benchmark this against information disclosed in other Private Finance Initiative projects.