11 The Department originally planned to procure the new permanent facilities for the College using public sector capital. However, the Government's policy of considering PFI as a procurement option for all projects and increases in the estimated cost of the public sector capital option led the Department to explore the PFI option. Having selected Defence Management as its preferred bidder, it took 16 months to agree a contract. Such lengthy negotiations with the preferred bidder were, however, a common problem on other PFI projects at that time. The Treasury has subsequently issued guidance which, if followed, should reduce the time taken on the negotiations of future deals.
12 During the negotiations there was a 4 per cent increase in the cost of Defence Management's bid and a number of changes in the proposed allocation of risk. In our view, the final allocation of risk agreed is broadly in line with other PFI contracts signed at that time. Before signing the contract, the Department confirmed that the PFI offered better value for money than the public sector capital option as, at £200 million, it was estimated to be cheaper by £23 million (over 10 per cent) and more affordable, and brought a number of non-financial benefits, including the establishment of the College in one building. We found no significant errors in the Department's calculations.
13 The Department changed the target date for the project from September 1997 to September 1999. Delays in negotiating the PFI contract then pushed this date back by a year to September 2000. In the meantime the Department established the College in interim facilities at Bracknell at a set-up cost of £10 million. The Department's 1998 value for money assessment correctly did not take account of these factors which had already occurred as it was concerned with the future cost implications. Our own analysis of the signed PFI deal against a hypothetical public sector capital option meeting the original target date of September 1997 confirmed that, even taking account of these factors, the use of the PFI was still likely to be cheaper. There were also affordability and non-financial benefits arising under the PFI option.
14 The PFI contract has delivered a number of benefits. Defence Management completed the construction of the new permanent facilities by the due date of early August 2000. This allowed the College to admit its first students at Shrivenham within days and to begin the Advanced course in early September. Such a rapid opening was a significant achievement. In addition, construction risk has remained with the private sector. For example, substantial extra costs arising from unforeseen ground conditions at the site have not been passed to the Department. Also, to date (November 2001) Defence Management's performance in delivering the support services and making the new facilities available has been assessed by the College as generally satisfactory.
15 This contract, and the College's experiences since contract signature, have highlighted a number of useful lessons:
■ The Department has built flexibility into the contract. For example, the Department and Defence Management agreed to share demand risk on student numbers later in the contract. In addition, at the end of the contract the College facilities will revert to the Department at no cost or the Department can exercise its option to leave these with Defence Management and walk away.
■ The performance regime emphasises the use of warning notices, rather than financial deductions, to secure the rectification of poor service delivery by Defence Management. This regime has provided a strong incentive for services to be delivered to the specified standards and the issue of one such notice did result in an improvement in catering performance. On other PFI contracts we have examined, the first recourse open to a department is to make a financial deduction. On this contract financial deductions can arise if poor service delivery is not addressed. These deductions are limited to a maximum of 10 per cent of the service delivery elements of the PFI fee, although the Department can also suspend all payments if service delivery is so poor that Defence Management is in default of the contract.
■ The Department managed the contract well during the construction stage, providing clear direction and leadership. There are also adequate provisions to enable the Department to manage the contract properly during the service delivery stage. The College has, however, identified that it needs to increase its resources for managing the contract.
■ The Department is seeking to incentivise Defence Management to help the College to control the cost of utilities and other items, which Defence Management purchases on the College's behalf and then recharges the College.
■ In moving from construction to service delivery a department needs to show leadership, and continuity within its project team, where possible, should also help. The contractor needs to ensure that the interfaces within its own organisation and with its sub-contractors are well managed to ensure that the department receives the service required.