Supplementary memorandum from HM Treasury
Delivering Multi-Role Tanker Aircraft Capability
During its hearing on "Delivering Multi-Role
Tanker Aircraft Capability" on Monday 26 July, the Committee
of Public Accounts asked HM Treasury to send it further information
on three points.
Firstly, HM Treasury was asked whether it considered
it acceptable to use PFI as a procurement method for defence projects
in general.
There is no reason why PFI should not be considered
for defence projects. The Ministry of Defence has assigned 54
PFI projects and of these has a current portfolio of 45 operational
PFI projects, the majority of which are operating successfully.
Although less widely adopted than in the United Kingdom, several
countries (such as The Netherlands, the United States and Australia)
have used PFI/PPP as a procurement route for defence infrastructure
such as headquarters and accommodation.
In general, there is increased scope for benefits
in equipment based PPPs, as the linkages between design and long-term
operation, and between build and maintenance, are much greater
for equipment-based projects. Although operational and security
related issues tend to narrow the potential for PFI in relation
to defence equipment projects, these issues are not insurmountable
in every case. So, whereas it is correct to suppose that PFI is
inappropriate for tanks, attack aircraft and warships which need
to be deployed flexibly and are operated and maintained (at least
in part) by service personnel, PFI can be appropriate in areas
such as training (for example, helicopter simulators), support
tasks (for example, the Heavy Equipment Transporter and strategic
sealift/roll on-roll off ferries deals) and ancillary services
(for example, dockyard tenders). Overseas, France and Greece have
delivered defence equipment PPPs for training helicopters and
simulators.
The Committee secondly asked whether the Treasury
considers that the approximately 10% added to the cost of the
project as the premium to be paid for increased risk transfer
in PFI is reasonable.
Finance can be considered in the same way as
other project inputs; for example, the increased cost of utilising
better building materials needs to be considered against the benefits
in terms of reduced whole life running costs. The scale of the
benefits that are delivered by the risk transfer enabled by private
financing depend on the nature of the project. (The aim of the
qualitative assessment of value for money prior to launching a
PFI project (see attached copy guidance issued by HM Treasury
in November 2006)[26]
is to ascertain those aspects of a project which could deliver
benefits that would outweigh the increased financing costs). Delivering
benefits of greater than 10% of the total project costs is considered
reasonable.
For example, a review of business cases presented
to the Treasury's Project Review Group for allocation of PFI credits
show that local authorities estimate a net value for money position
(ie the benefits in terms of reduced whole life costs of the project
when offset by the increased cost of financing, discounted at
3.5%) of better than 10% is not uncommon. As mentioned above,
there is usually an increased scope for benefits in equipment
based PFIs such as the Future Strategic Tanker Aircraft (FSTA).
The Treasury was thirdly asked to clarify whether
the Ministry of Defence was given an exemption from the 3.5% discount
factor outlined in the updated Green Book rules of 2003, and instead
allowed to calculate net present values based on a 6% discount
factor.
In 2003, the Green Book guidance on assessing
public sector spending and investment was updated. The previous
6% discount rate provided not only the net present value of the
options but also included the risk figures for the project. Under
the new guidance the risk assessment is separated out into a separate
assessment, and the discount rate has been reduced to reflect
this. Projects that were started under previous Green Book guidance
were allowed to continue using the 6% discount factor as their
value for money benchmark. This was true for all departments
who had PFI projects that had issued their Invitation to Tender
prior to 2003. See paragraph 9 of the attached copy of Treasury
guidance letter of 26 April 2003 to all departments.[27]
It was appropriate to use this policy for the
FSTA project. The project was started in 1999 when the old guidance
was still in place, and the 6% discount factor had been used at
the time of formal engagement with industry in the issuance of
the Invitation to Tender—the key value for money point for
deciding whether or not to pursue PFI as the procurement route.
Value for money comparisons were re-conducted later at both the
6% and the 3.5% discount factor rates and the National Audit Office
report makes clear that deal was favourable on all but one value
for money comparison (of eight).
Alternate Treasury Officer of Accounts
HM Treasury
3 September 2010
26 Not printed here. Back
27
Not printed here. Back
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