Select Committee on Public Accounts Twenty-Third Report

3 Management and value for money of the New Accommodation Programme

14. The estimated total cost of the new accommodation programme for the thirty years of the PFI deal is £1,623 million (cash) or £783 million at net present value.Figure 2: Estimated cost of the New Accommodation Programme
Cost in cash £m
Net present Value £m
Unitary Payments to IAS for the PFI deal
Additional payments to IAS for contract variations
Payment to IAS for early completion
*Technical transition to 2004-05 (approved budget)
**Retention costs of Oakley Plot 2 — 2005-06 to 2011-12
Additional costs associated with GCHQ's New Accommodation

This table shows the transition costs of moving GCHQ's business into the new building and the costs of providing accommodation and services for the thirty years of the PFI deal.

*This figure excludes the cost of in-house technical staff effort associated with transition estimated at 978 man-years and other GCHQ manpower and running costs.

**This figure includes provision for payment of £17 million to IAS in July 2007 in lieu of proceeds from the sale of that part of the Oakley site that GCHQ is retaining as part of its extended transition period. It also takes into account recovery of the £17 million in 2011-12 when the land is sold less demolition (£5 million) and other costs (£2 million).

Discount base date: January 1999.

Source: GCHQ

15. When the significant increase in the estimated cost of technical transition from £41 million to £450 million was identified in 1999, the Cabinet Secretary commissioned Lieutenant-General Sir Edmund Burton to report on the project's management. On the question of technical transition costs, his Report in May 2000 found that GCHQ's earlier management had focused solely on the PFI building and associated services and had not approached the project strategically as a move of GCHQ's whole business. It also identified high level planning and management weaknesses and concluded that the failure to co-ordinate the development of the PFI deal and the transition process at strategic level was a symptom of such weaknesses.[28]

16. The Cabinet Office accepted that the original scoping of the programme had not been well done and that the difficulties associated with moving a very complex networked, IT-based set of systems should have been brought out earlier.[29] The Burton Report covered 43 recommendations on the basis of a more strategic approach to be deployed across GCHQ and not just the management of the PFI project. As a result of the Report, GCHQ had completely redesigned its financial and operational planning with a range of initiatives, none of which existed before May 2000.[30]

17. GCHQ took the Office of Government Commerce guidance and developed it to fit the New Accommodation Programme by building into it various aspects of system engineering and risk management. The lessons learned were available to other government departments directly through the Office of Government Commerce and more directly through GCHQ's contacts with other departments.[31]

18. GCHQ accepted that the secrecy of its work had previously inhibited questioning of how it did things and that in many ways its management had suffered accordingly. But it claimed to have moved from that situation, seven or eight years previously, of an inward looking organisation content that it knew how to manage its business to one which actively sought best practice from the outside world.[32]

19. GCHQ believed that the new accommodation programme would deliver best value for money. It considered that high technical transition costs were inevitable and would have had a neutral effect on whatever accommodation solution was chosen, whether the PFI deal or a conventionally financed alternative represented by the Public Sector Comparator.[33] In the light of the extra costs of technical transition that emerged it had reviewed its accommodation options and concluded that there was no reason to believe that there was a better alternative to the PFI deal selected.[34] GCHQ considered that the benefits that would have come from using the Public Sector Comparator would have been miniscule compared to those with the PFI deal.[35]

20. In assessing value for money of capital projects competition is a key factor. In the case of GCHQ's new building, competition for the PFI deal ceased when the preferred bidder was chosen and the price subsequently increased by 21%. GCHQ made use of comparison of the PFI deal with the Public Sector Comparator figures as an indicator of value for money.[36] In this case the comparator was a return to modernisation of GCHQ's existing two sites and the comparison showed an advantage of £71 million in favour of the PFI deal.Figure 3: The final comparison between the PFI bid and the Public Sector Comparator
Net Present Value (£ millions)
IAS deal Public Sector Comparator
Building, refurbishment and services 489Basic 605
Risk Adjustment 151
Technical Transition 26468
Total 753 824

The exercise also showed broadly similar services to be retained by GCHQ under each option of £99 million (PFI) and £94 million (comparator). These are not significant to the comparison made.

The table (which excludes retained services as described above) shows that the final IAS bid cost some £71 million less than the Public Sector Comparator, including estimates for technical transition.

The technical transition costs were much lower in the Public Sector Comparator at £68 million because GCHQ assumed it would remain on two sites and use some of the existing buildings if the PFI deal did not go ahead. Technical transition would, therefore be less complex and costly. The PSC technical transition would deliver significantly less benefit to GCHQ and result in later additional expenditure to modernise its infrastructure.

The technical transition costs for the PFI deal shown above cover the first five years only.

Source: GCHQ

21. The Comparator included £151 million for additional risk as a measure of the average cost overrun of 24% in public sector managed projects. This figure was the percentage given by the Treasury, who said that it was at the bottom of the range and it arose from a study carried out by a firm of consulting engineers.[37] This risk allowance in itself more than accounted for the difference between the PFI bid and the Comparator and had done so in other projects as well.[38]

22. Other PFI deals had used different, lower risk addition percentages; and with a range of other adjustments available from the use of different discount rates (and the way service costs were spread),[39] it seemed to us that the Public Sector Comparator figures could be used to demonstrate any result required.[40] Such uncertain figures risked clouding the issue of value for money and could cloak a predisposition to go in for PFI.[41]

23. PFI represented something like 10% to 15% of the government's capital projects, so there were also a large number of traditional procurement projects going on within government. The Office of Government Commerce had a number of initiatives in hand to try to improve the public sector performance in traditional procurement contracts.[42] The Treasury said that they would in due course update their analysis of the way in which government departments managed large projects.

28   C&AG's Report, paras 4.16-4.17, 4.19 Back

29   Q 11 Back

30   Qq 96-99 Back

31   Qq 43-44 Back

32   Q 121 Back

33   C&AG's Report, para 5.35 Back

34   ibid, paras 5.37-5.40 Back

35   Q 52 Back

36   Q 45 Back

37   Qq 46-47 Back

38   Q 48 Back

39   Q 56 Back

40   Q 127 Back

41   Qq 53, 59 Back

42   Q 130 Back

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