3 The Private Finance Initiative contract
with Fujitsu
15. The Department's IT infrastructure was taken
over by ICL (now Fujitsu) from April 2000 under a Private Finance
Initiative (PFI) contract. This contract is for IT infrastructure
services only; development of electronic services is done in-house,
with external partners if necessary.[20]
16. The whole life cost of the 10 year contract when
it was originally let was £500 million (with an estimated
net present value of £398.2 million). By 2003 the cost had
risen to £680 million. This was due partly to an increase
in the number of Departmental staff user from 18,000 to 22,000
and partly due to new or enhanced information systems and services,
such as the national co-ordination unit. This unit gathers and
disseminates intelligence information to Customs staff to help
target their operations.[21]
17. Customs found it increasingly difficult under
the contract to make changes to the IT infrastructure. The original
contract contained some flexibility but Customs had not foreseen
the extent of the changes needed for the e-programme. With assistance
from Rothschild, Customs compared the value for money of amending
the contract to cope with changes needed with the option of terminating
the contract and re-tendering. They found that the termination
route was marginally better in cost benefit terms, but would put
at risk £508 million of existing revenue and a further £472
million from a two year delay in delivering the benefits of the
e-programme. Customs therefore decided not to retender.[22]
18. The contract amendments agreed in August 2003
increased the net present value of the 10 year contract to £631
million and the whole life cost to £929 million. All the
increase in costs was for additional or enhanced services. Customs
does not expect further significant amendments but does not rule
out changes to deal with, for example, new services.[23]
19. In July 2003 the Chancellor announced a major
review of the organisations dealing with tax policy and administration
(Customs and Inland Revenue) chaired by the Permanent Secretary
to the Treasury, Gus O'Donnell. The primary purpose of the review
was to make public service delivery more effective and efficient,
examining ways to enhance service delivery through closer working
or organisational change. At the time of our examination the review
had not reported. Customs considered that the review might affect
Customs' IT needs but that its IT infrastructure could, if necessary,
be connected to the Inland Revenue's systems at no significant
additional costs. However, if the review led to the breaking up
of current service provision under the PFI contract, Customs might
have to reach a negotiated settlement with Fujitsu. The review,
Financial Britain's Future - Review of the Revenue Departments,
published in March 2004 announced the creation of a new department
integrating the work of Customs and Inland Revenue. It found that
the differences in IT provision should not present a barrier to
the integration of the departments. But management would need
to consider their IT strategy including the need to harmonise
provision, to identify the model that will best serve business
needs and ensure a collaborative approach to resolving any issues
that arise bringing in IT partners promptly.[24]
20. Since Customs entered into the contract with
Fujitsu, the Treasury has issued revised guidance on managing
major IT projects and the use of PFI. New procedures introduced
in February 2003 permit departments to authorise only modular,
incremental IT developments and implementations. 'Big bang' projects
have to be approved by a central scrutiny authority. In July 2003
the Government announced that there would be a presumption against
future IT projects using PFI which would be replaced by a range
of procurement models. This was because
PFI deals for IT, unlike construction, had not led to a step change
in performance; were unlikely to attract third
party finance and had not coped well with rapid technological
change.[25]
21. In December 2003 the Office of Government Commerce
issued a consultation document on guidance to help departments
decide the best strategy for the procurement of IT. The guidance
outlined three broad strategies. The guidance notes that the more
stable the technology, the more likely it is that long-term contracts
using a partnering or output specification approach will be appropriate.
More innovative projects, however, are likely to have a better
chance of success with short, small, input-based contracts, thereby
minimising costs if the innovation does not work. This guidance,
when finalised, may also help departments in selecting the appropriate
procurement strategy when new services or major changes are needed
in an existing PFI contract.[26]
20 C&AG's Report, Executive Summary, para 13 and
Report, para 2.18 Back
21
Qq 43-44, 72-73, 76, 82; C&AG's Report, Executive Summary,
para 13 and Report, para 2.18 Back
22
Qq 9, 42-43; C&AG's Report, paras 2.18-2.19, 2.21 Back
23
Qq 71, 112; C&AG's Report, para 2.22 Back
24
C&AG's Report, para 2.23; Financing Britain's Future -
Review of the Revenue Departments (Cm 6163), March 2004 Back
25
Qq 122-123, 129-130; Ev 13-15; PFI: meeting the investment
challenge, HM Treasury, July 2003; Delivering success in
Government IT-enabled projects & programmes, DAO (GEN)
01/03 Back
26
Q 123; Decision map for procurement and accompanying guidance
for IT contracting, Office of Government Commerce, December
2003 Back
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