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NAO publishes report on the allocation and management of risk in Ministry of Defence PFI projects

On 30 October 2008, the National Audit Office published its report entitled “Allocation and management of risk in Ministry of Defence PFI projects”.

The report finds that "[m]ost Ministry of Defence projects funded by PFI deals are delivered satisfactorily, on time and on budget. In six of the eight projects examined by the NAO, the Department has generally achieved value for money through effective allocation and management of risks. Failures to identify and manage risks reduced the value for money achieved from the other two projects reviewed by the NAO.

Most MOD PFI projects are now providing important support to military and civilian staff. They cover a portfolio of more than 50 projects delivering a broad range of services such as equipment, buildings, training and communications. The Department has developed commercial disciplines for scrutinising the value for money of its PFI procurements and has extended these into other projects.

While the MOD allocates and manages many of the project risks effectively, it does not always have the robust data necessary to understand the risks it is asking the private sector to bear. In at least seven projects, the decision to use PFI has been reversed. It may be that, in some of these cases, risks were not fully understood at the outset. In one case, six years elapsed before the MOD aborted a planned PFI procurement for Armoured Vehicle Training Services (AVTS), at a cost to the taxpayer of £15 million. Half of this cost relates to the purchase of Intellectual Property Rights which the Department intends to exploit. The Department estimates that the alternative solution subsequently procured will lead to savings of some £30 million over the next ten years in live ammunition. 

There is scope for improving procurement times. Overall, the PFI projects surveyed by the NAO took an average of 37 months to procure compared with the PFI average across government of 34 months. And larger PFI projects with a capital value over £50 million took the MOD an average of 45 months to procure. This longer procurement time reflects the complexity and special requirements of the Department’s projects compared with repeat projects such as hospitals or schools but there is also some scope for the Department to improve the speed at which it closes larger deals. It is seeking to do so through improvements to the oversight of its capital procurements.

The NAO also highlight the risk that contractors may incorrectly report performance which would otherwise lead to payment deductions. Staff of BT inflated the number of calls handled in the Defence Fixed Telecommunications System. The MoD subsequently recovered £1.3 million from BT.

Tim Burr, head of the National Audit Office, said today:

“Most of the private finance projects in its portfolio of more than 50 have been delivered successfully by the Ministry of Defence. But the Department needs to be more alert to the risks that can emerge once the project is up and running, such as inaccurate performance reporting. It could also reduce procurement times by speeding up its decision-making, and by collecting better information at the outset on current and prospective use of the service and the condition of assets.”"

Click here for a copy of the report.