Select Committee on Public Accounts Twenty-Third Report

1 GCHQ's acquisition of a new headquarters building

1. In the 1990s GCHQ had a rolling programme of building replacement at its two sites in Cheltenham, at Oakley and Benhall, which it had occupied since 1952. By March 1996 funding constraints meant that this would take much longer to implement than planned. In 1996, with the advent of Government policy that all new capital expenditure should be tested for suitability as PFI projects, GCHQ first explored the possibility of acquiring new PFI buildings at Benhall and then, in 1997, decided to expand the project to cover the whole of its accommodation in Cheltenham.[2]

2. GCHQ embarked on a competitive tendering exercise to provide new serviced accommodation within a radius of ten miles of Cheltenham. It followed best practice based on guidance issued by the former Private Finance Panel Executive and Treasury Task Force and issued an invitation to tender that was generally output-specified with a strong emphasis on flexibility. A short list of four consortia who were invited to tender offered bids ranging from £328 million to £485 million at net present values.[3] GCHQ told us that these bids had not been good enough and had added an extra stage of competition with just two bidders, IAS and Oakley.[4]

3. In September 1998 GCHQ selected IAS as the preferred bidder on the basis of their Best and Final Offer of £404 million compared with Oakley's £493 million for delivery of accommodation and services over a thirty year period.[5] The contract was signed 21 months later, in June 2000, by which time IAS's bid had increased by 21% to £489 million without the benefit of full and open competition. The equivalent increase in the main annual Unitary Payment in this period was from £37.5 million to £45.6 million.[6]Figure 1: Changes in Unitary Payments (UP) during the single bidder negotiation period
Bid Date UP 1 UP 2 UP 3
(£ m/year) (£ m/year) (£ m/year)
Best & Final Offer Sept 1998 16.6 29.526.2
Adjusted to meet scope Sept 199816.6 *37.534.2
Revised bid March 1999 16.6 44.339.3
Revised bidJune 1999 16.641.2 39.2
At Contract Signing June 2000 **16.5 **45.6 **43.8

The figure shows that the Unitary Payments increased as a result of resolving non-compliances and meeting changes in scope following IAS's selection as preferred bidder.

*This is GCHQ's estimated increase over the Best and Final Offer to meet the full scope of its requirements. It is comparable in scope with all the subsequent figures up to and including contract signature.

**These payments are equivalent to a total of £489 million net present value or £1,247 million cash over thirty years.

Source: GCHQ

4. IAS's Best and Final Offer had been non-compliant in a number of ways and it needed quite a lot to bring it up to GCHQ's specification at contract signature. In particular, the cost of service level agreements had not been finalised and there was a need to settle on one of the two sites offered by the bidder.[7] As a result, the Benhall site was not chosen until May 1999.[8] About 9% out of the 21% increase was not priced through competition; the remainder was priced as a result of information already obtained during earlier stages of the competition.[9]

5. GCHQ told us that the increase beyond competition resulted from higher staff numbers, the consequent increases in services to the slightly bigger building, inflation and in increase in finance costs because of the way the bond market worked.[10] Asked whether it was prudent to accept the original bid from IAS so readily, GCHQ said that it was a judgement to draw competition to a halt at that stage. The other bidder was considered so far behind in terms of both quality and price that there was no realistic prospect of them getting to the point of being the winner. GCHQ also had to act responsibly in terms of how much effort it was requiring the private sector to put in at a point when it already knew who the winner was going to be.[11]

6. The cost of the PFI deal is £1,247 million cash over thirty years, equivalent to £489 million net present cost. The construction of the new building was finished early in June 2003. GCHQ told us that the new single building was a much tougher structure than the existing accommodation where the intelligence production operation was carried out and that it was more resilient to most forms of attack that could be foreseen.[12] There were a number of faults to be rectified before it could be accepted as complete and GCHQ required further work in the form of contract changes. GCHQ said that IAS were due to be paid a bonus of £2.2 million for early completion but this was reduced by about £100,000.[13] About 99.9% of the job had been completed by the middle of June and GCHQ could not force IAS to incorporate its contract changes without putting the achievement of IAS's bonus at risk.[14]

7. As to the size of the new building, GCHQ said that it would now have to cope with higher staff numbers than originally planned, mainly due to changes in customer requirements following the terrorist attacks on 11 September 2001. Some 200-250 staff would be accommodated at the retained Oakley site while new and more flexible ways of utilising the new building's space were explored.[15] GCHQ had made some small changes to the way the building was configured and used and was moving away from the concept of one person, one desk. On any particular day 20% to 30% of desks were likely to be empty because people were away for various reasons and currently there were 5% more staff than desks; it thought it could cope with a 10% margin and perhaps significantly beyond that. Staff were being encouraged to use green transport to counter a 15% reduction in parking spaces from current levels. Walking, cycling and car sharing were being promoted and GCHQ was working with the local authority to improve bus services.[16]

2   C&AG's Report, para 1.15 Back

3   ibid, para 2.15 and Figure 4 Back

4   Q 2 Back

5   C&AG's Report, para 2.24 and Figure 5 Back

6   ibid, para 3.15 and Figure 7 Back

7   C&AG's Report, paras 3.1-3.2 Back

8   ibid, para 3.6 Back

9   Q 1 Back

10   Q 1 Back

11   Q 2 Back

12   Q 42 Back

13   Ev 18-19 (GCHQ's update memorandum, paras 2-4) Back

14   Q 113 Back

15   C&AG's Report, para 5.33 Back

16   Qq 32-33 Back

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