1 The Department could have reduced
the project risks
1. The Department chose to procure the contract for
redeveloping the National Physical Laboratory (NPL) using the
Private Finance Initiative (PFI).[2]
The procurement was based on the delivery of specified outputs.[3]
The intention was to transfer the design risk to the private sector.[4]
2. The redevelopment involved the construction of
over 400 laboratories, many of which had to meet exacting environmental
requirements, such as for temperature and sub-audible noise control.[5]
The specification for the development was drawn up between the
prospective contractors, engineers and scientists on the basis
that the new facilities would replicate the specification of the
existing laboratories in terms of their performance, but with
increased reliability and over a greater volume of space.[6]
3. Expressions of interest in the project were initially
received from ten consortia. The Department short-listed four
of these to bid for the contract, but two subsequently withdrew.[7]
The two remaining bidders were Laser, a special purpose company
jointly owned by Serco Group plc and John Laing plc, and a consortium
called Osborne.[8] Following
an assessment of the bids, a twenty-five year PFI contract was
let to Laser in July 1998, under which the company would redevelop
the NPL facilities and provide property management services.[9]
The planned cost of the new buildings was £96 million. The
Department would pay a unitary charge of £11.5 million a
year once the buildings were complete.[10]
4. At the time the contract was let the NPL redevelopment
included the most technically demanding requirements yet specified
under the PFI.[11] Nonetheless,
the Department did not consider that the project was too complex
for the PFI, and believed that it would be possible to achieve
the output specification since it was being met in the existing
NPL buildings and at the American National Institute of Standards
and Technology.[12]
5. Concerns regarding the suitability of the project
designs were first identified during the evaluation of the two
bids received by the Department. The bid evaluation team's assessment
of the bids concluded that neither bidder had demonstrated how
they would meet the requirement for stringent temperature controls
in certain laboratories. The evaluation team suggested that the
bidders should work up their designs by constructing a pilot laboratory
but the Department did not follow up this idea because of potential
costs and delays, the risk that the potential contractors would
walk away from the project, and the confidence it had in John
Laing Construction Ltd (JLC Ltd) as the building contractor.[13]
6. The bidders were also encouraged to consider opportunities
to develop surplus land made available by the consolidation of
the NPL facilities on a smaller site.[14]
The Department's intention was that the cost of the project would
be reduced by the amount of the proceeds from the sale of the
land.[15] However, the
Department's concerns that Osborne's proposals for the development
of the surplus land might not be acceptable to the planning authority
effectively ruled Osborne out of the bidding, and Laser was left
without strong competition to encourage it to improve its proposal.[16]
The Department now accepted that better cultivation of the market
to secure more bidders would have been helpful.[17]
At the time, however, it had believed that Laser could deliver
the project, and that the low number of bidders did not bring
the feasibility of the project into question.[18]
7. The Department had felt able to proceed with Laser
because John Laing Construction Ltd had extensive experience of
constructing specialist laboratories and part of the Serco Group
plc had been running the science facilities at the NPL, and because
by the time the contract was signed it had designs from Laser
which gave it the necessary confidence.[19]
The Department's due diligence enquiries gave it no reason to
doubt JLC Ltd's technical or financial capability to deliver the
project.[20] The appointment
of Laser as preferred bidder was considered preferable to re-tendering
in an effort to increase the number of bidders.[21]
The Department also considered that by transferring design and
construction risk to Laser, the financial and reputational consequences
of failure would provide an incentive for Laser and JLC Ltd to
meet the requirements of the output specification.[22]
8. In the event, construction encountered serious
delays and difficulties in meeting the specification.[23]
Although the best and final offer from Laser showed that some
of the suggestions made by the Department's advisers had been
incorporated in the designs, when later a pilot was built it became
clear that the design of the pilot did not reflect the designs
that had been discussed. By this time construction of the main
facility had begun, making it difficult to change course.[24]
John Laing plc told us that JLC Ltd had grossly underestimated
the technical complexity of the job and had failed to test rigorously
its own competence, and that of its sub-contractors, to deliver
the project.[25] The
Department also now thought that it should have scrutinised more
thoroughly the technical capabilities of the contractors.[26]
9. The structure of the contract meant that JLC Ltd
received payments based on progress with building work rather
than meeting the output specification. By 2001, it had been paid
£76 million against an agreed fixed price contract of £82
million, although only nine out of the sixteen modules were finished
and further work was required to meet the specification.[27]
At this point JLC Ltd estimated that the cost of completing the
project would be at least £45 million, while it could only
earn a further £6 million. JLC Ltd also estimated that its
future losses would greatly exceed its £31 million contractual
liability to Laser.[28]
10. Although the facilities are being delivered many
years late, the Department believed it would not have had sufficient
capital to develop the facility using traditional procurement
methods. To have followed the traditional procurement path would
have resulted in a piecemeal development and a high level of disruption
to the ongoing scientific work at the NPL.[29]
The availability of the existing facilities had allowed the NPL
to continue its scientific work despite the delays in construction.[30]
2 C&AG's Report, para 2 Back
3
C&AG's Report, para 2.2 Back
4
Qq 33-37 Back
5
Qq 5, 111; C&AG's Report, para 2.3 Back
6
Qq 28, 61, 65 Back
7
Qq 56-57; C&AG's Report, para 2.12 Back
8
Q 56; C&AG's Report, para 1.2, Figure 9 Back
9
Q 40; C&AG's Report, para 1.2 Back
10
C&AG's Report, para 1 Back
11
C&AG's Report, para 2.3; Q 55 Back
12
Q 5 Back
13
C&AG's Report, para 2.4; Qq 14-15, 31 Back
14
C&AG's Report, para 2.13 Back
15
Q 53 Back
16
Qq 121-122 Back
17
Q 80 Back
18
Q 107 Back
19
Q 2 Back
20
Q 3 Back
21
Qq 80, 110 Back
22
C&AG's Report, para 2.5; Q 34 Back
23
C&AG's Report, paras 1.10, 1.11 Back
24
Q 32 Back
25
Qq 14, 88 Back
26
Q 80 Back
27
C&AG's Report, paras 2.28-2.29 Back
28
C&AG's Report, para 1.19 Back
29
Qq 5, 86, 124 Back
30
Qq 25, 124 Back
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