There were nine months of exclusive negotiation with BT

2.32  When the Department selected BT as preferred bidder in November 1996, they expected to let the contract by early 1997. Many detailed aspects of the contract, however, remained to be finalised. The Department began exclusive negotiations with BT which were to last for nine months until the contract was signed in July 1997. The terms negotiated during this period included the details of price indexation, compensation for poor performance, and the arrangements for a further competition at the end of the contract period. The Department obtained some changes in their favour and conceded on others. While the level of concessions was not unreasonable, there were some potentially onerous terms, tabled earlier by BT, which remained unchanged. For example, BT can make additional charges if service delivery is outside their normal delivery method (Figure 7 and Appendix 3, Risk 6). But BT and the Department agree that this will only take effect if the Department directs BT to operate in such a way.

2.33  During this period the prices of some services changed. For example, the Department managed to negotiate a lower tariff for the UNITER service. The tariffs for the Local Area Network Interconnect services (Figure 2), however, increased during this period. This was a new service and the Department were not certain of their exact needs, so they had invited bidders to tender broad estimated prices for the services. This meant there was only limited competition for the services.

2.34  When BT had become preferred bidder the Department had estimated the total project cost at£781 million in present values, comprising payments to BT and residual costs remaining with the Department. The Department identified that the expected payments to BT had risen by £77 million during the subsequent negotiations. Around £67 million of the increase was due to the inclusion in the project of additional services, and earlier than planned transfer to BT of responsibilities for the Circuit Switched and Point to Point Services offset by a reduction in UNITER requirements. The Department's residual costs had, however, decreased by £40 million as a result of these changes. After taking account of other ongoing cost reductions of £35 million the Department reduced their estimate of the total project cost increase to some £2 million (Figure 11). Around 90 per cent of the increase in payments to BT related to additional services purchased at tariffs determined in the competition. On the basis of this, and a reduction in the costs of UNITER, the Department consider that a small improvement in value for money was achieved.

2.35  In addition to the financial savings achieved, the contract contains a number of non-financial efficiencies and innovations for users and managers, as shown in Figure 12.