2.23 Figure 10 shows the extent to which the Agency's initial estimate of the resources they would require to procure a Private Finance deal was exceeded. They subsequently revised this estimate (in May 1995) when they realised that the initial estimate had been optimistic. The main reasons for the overrun in procurement costs were as follows:
a) The Agency, like other clients for ground-breaking Private Finance projects, greatly underestimated the complexity of the project and therefore the extent of the support and information which bidders would require, as well as the difficulty and range of the contractual issues to be negotiated;
b) The assumptions made when the procurement started as to the project timetable and the size of the project team were proven to be too short and too small respectively;
c) The Agency initially felt that the role of Masons, their external legal adviser, could be limited to providing advice, transferring skills and conducting quality assurance on work done by internal contract experts, at a cost of £80,000. In November 1995, due to the specialist nature and complexity of the contract, the Project Board approved the extension of Masons' role to include negotiations with bidders and the drafting of the contract documentation. This additional work was estimated to increase Mason's costs to £220,000, but when the timetable was extended in 1996 and 1997, this estimate also proved to be too low; and
d) When the Agency appointed legal and financial advisers in competition in January 1995, they negotiated fee rates that were to apply only until the end of August 1995. After this period, the Agency needed to maintain the continuity and knowledge of their negotiating team and therefore reappointed the legal advisers without competition on four successive occasions and the financial advisers on five occasions. Over this period rates for provincial and London legal work increased on average by 9 per cent and 10 per cent and those for financial advice by 58 per cent.
| Figure 10 |
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Comparison of the original project cost estimate with outturn |
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| This shows the increase in project procurement costs between the start of procurement work in November 1994 and the closure of the deal in January 1998. The Agency's procurement cost of £4.411 million represents just under two per cent of the £226 million discounted contract value. | |||||||||||||
| Item | Original estimate | Update | Outturn | ||||||||||
| In-house staff | 137 | 821 | 1,281 | ||||||||||
| Non-staff costs (eg travel, training) | 10 | 123 | 200 | ||||||||||
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| Legal Advice (Masons) | 70 | 453 | 2,335 | ||||||||||
| Financial Advice: (Kleinwort Benson) | 123 | 271 | 404 | ||||||||||
| Other consultants (mainly property and insurance issues) | 57 | 72 | 191 | ||||||||||
| Total external advice | 250 | 796 | 2,930 | ||||||||||
| Total project costs | 397 | 1,740 | 4,411 | ||||||||||
Source: Project Budgetary Control Reports |
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2.24 In commenting on the figures for fee rate increases, the Agency have said to us that:
a) in their view, the initial fee rates which they negotiated were very competitive; and
b) in relation to the rates for financial advice, these compared reasonably over the life of the project with similar rates negotiated by the Department under overall framework contracts with other advisers.