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
|TYPE OF COST
||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
|TOTAL COST OF PROGRAMME
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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
|Net Present Value (£ millions)
||Public Sector Comparator
|Building, refurbishment and services
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
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
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.
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. 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
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),
it seemed to us that the Public Sector Comparator figures could
be used to demonstrate any result required.
Such uncertain figures risked clouding the issue of value for
money and could cloak a predisposition to go in for PFI.
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
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
Q 11 Back
Qq 96-99 Back
Qq 43-44 Back
Q 121 Back
C&AG's Report, para 5.35 Back
ibid, paras 5.37-5.40 Back
Q 52 Back
Q 45 Back
Qq 46-47 Back
Q 48 Back
Q 56 Back
Q 127 Back
Qq 53, 59 Back
Q 130 Back