AM75052

AMA RESEARCH Market Report : UK PFI in the Defence Sector : July 2002

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Brief Description

AMA Research has recently published the PFI in the UK Defence Sector Market Report 2002.  The report incorporates detailed research and provides a comprehensive review of PFI in this sector, with information collated from a wide range of trade and other sources.

Over 108 pages, the report covers:

The level of PFI in the Defence Sector - size, trends, key influences.

Case Studies - covering Defence Fixed Communications Systems,  Non-Combat Vehicles, Medium Support Helicopter Aircrew Training Facility etc.

Major Suppliers in the PFI Market - Construction companies, Financial Institutions etc.

Overall UK Defence Sector Analysis.

The report also has an International perspective covering  MOD involvement in Multi-National Defence Co-operation, assessing the benefits and risks and the possible future developments in this area. Collaborative Procurement Programmes are also assessed and a review of European Defence programmes is incorporated. The potential for use of PFI in the International Defence Arena is also assessed.

Key issues such as the Defence Research Agency are also reviewed, and the report also considers Best Value and the potential for fraud in the sector.

The contents list is shown below and in addition, the summary of the report is also illustrated below.

Other Reports in the PPP/PFI Industry:

PPP/PFI in the UK Health Sector 2002.

PPP/PFI in the Republic Of Ireland 2002.

PFI Issues in the UK 2001.

PFI Intelligence Bulletin - Ongoing.

PFI and Specification Issues in UK Social Housing 2002.

PFI in the Local Authority Sector 2002.

Executive Summary

The use of PFI to provide capital requirement for the public sector has only a relatively short history within the UK. Although developed by the Conservative government in the 1980's, it has only been in the late 1990's that significant progress has been made in its adoption as a procurement solution within the public sector.

This has also been true for the Ministry of Defence (MOD), who are a significantly large purchaser of a wide range of goods, equipment and services. The use of PFI was only adopted by the MOD in the mid 1990's but has since grown to be a large and significant part of the defence procurement process. The level of estimated capital expenditure for signed PFI projects within the Ministry of Defence for financial year 2000/2001 was £828 million.

The type of PFI contract has also altered considerably since 1995/6 when the first contract was for the supply of RAF white vehicles fleet for a period of five years. Both the contract life span and the extent of contracts have changed since the mid 1990's with contracts now offered for between 10-40 years and on a Tri-Service or MOD wide basis.

The real impetus for the use of PFI in MOD procurement arrived in the late 1990's and was accelerated by the Strategic Defence Review (SDR) of 1998, which examined all aspects of the MOD operation. Recommendations of the SDR included the need to provide a front-line defence service for the UK and enhance the role of the UK's armed forces in the wider international arena in order to adapt to changing requirements for defence forces on a global scale.

The procurement procedures of the MOD were also examined under the SDR and the recommendation that cost effective purchasing process that provided value for money is attaining requirements were recommended - the Smart Procurement Initiative was born. Although the MOD had experimented with PFI previous to the SDR, it was the review that provided significant further impetus for wider adoption of the process. By the late 1990's the MOD was seeking to procure a wider range of capital goods and services under this purchasing procedure.

The most significant aspect of the adoption of the PFI solution in defence procurement has been the alteration in the way that the MOD conducts its business. Traditionally, the MOD had been used to prescribing detailed contract specifications and seeking interest from a select number of preferred bidders. The use of PFI has meant that the MOD now deals in requirements and has to provide more information to bidders by mechanisms such as the Public Sector Comparator (PSC) and by holding industry days prior to the bidding process. Potential bidders are also given more freedom in the detailing of how the requirements will be met and are involved in a higher level of negotiation at the later stages of the procurement process.

Reviews of the use of the PFI process in defence procurement have on the whole been relatively favourable to date. The majority of instances have shown that the MOD has struck a good deal and cost savings have been demonstrated by the use of PFI rather than the method that would have had to have been used if PFI did not exist. However, a number of lessons have also been learnt and include the framing of contracts, fairness of competition to bidders and the need to ensure that the performance of the contract continues to ensure value for money whilst allowing the contractor to derive allowable, but not excess, profits.

As the extent of the potential for the use of PFI contracts has increased within the MOD, so has the scale of the projects involved. Some projects under consideration are very large scale such as Allenby/Connaught, with current estimated capital expenditure in excess of £1 billion for a single project.

The MOD is fully committed to using PFI to provide requirements in the future. Its current stance is that the private sector should be further encouraged to take a more active role in the provision of capital equipment, facilities and services for projects that are not involved in front-line defence areas. In addition, the MOD has also stated that it will only consider other Public Private Partnership (PPP) procurement methods when the PFI solution has been effectively ruled out.

Although the MOD has adopted a significant level of both PFI and PPP solutions to procurement contracts it still uses a number of more traditional methods of procurement for equipment such as strategic weapons. In addition, the MOD has also encountered resistance from a variety of sources for privatisation of resources that it considers to be non front-line. The prime example of this was the proposed privatisation of the Defence Evaluation Research Agency (DERA) which generated opposition from a number of areas within the UK including trade unions, MP's and most significantly sustained pressure from the USA.

The range of contracts offered by the MOD under PFI have ranged from the supply of vehicles, through to buildings and accommodation services and the building and maintaining of bespoke training facilities and training courses. This has resulted in a large number of organisations operating in various different fields being included as significant suppliers to the MOD. In addition, the use of consortia in the larger contracts has extended the number of organisations involved in any one contract as organisations pool their specialist capabilities in order to fulfil the requirement of the contract. Leading suppliers to the MOD under PFI have included AMS - Alenia Marconi Systems, CAE Systems, Flagship Training, EDS, Integris, Bombadier Services, Aviation Training International, Amey/Kvaerna and Morrison Construction.

The future prospects for the use of PFI within UK defence procurement are reasonably optimistic. Proposed contracts that are currently at differing stages of the procurement process, have a current estimated capital expenditure value in excess of £13 billion. In addition, regular review processes of MOD requirements continue to highlight new areas/projects for which PFI might be suitable.

However limiting factors do exist and include the successful take-up of PFI extending the life-span of contracts, leading to decreases in the number and value of contract available in future years. Another issue is the influence that any change in government may have which may result in an opinion swing against PFI as a public sector procurement process. Although very successful within the UK MOD, the PFI procurement process has yet to make any significant progress in the field of international collaborative procurement.

Companies Mentioned

Arthur Anderson, Enterprise LSE, Alenia Marconi Systems, CAE Systems, Flagship Training, EDS, Integris, Bombadier Services, Aviation Training International, Amey/Kvaerna, Morrison Construction, Alaska Food Diagnostic Ltd, Circus Captital Technology, Birkitt Enterprises, MAFF, Porton Down, Great Western Commerce & Enterprise, New Sarum Enterprises, CAE Electronics, Vega Group plc, Serco Ltd, CVS Aircrew Training plc, Westland Helicopters, Augusta Westland Company, FR Aviation Ltd, Cobham Group, Bristow Helicopters, Offshore Logistics Inc, Bombadier Inc, Kvaerner A.S.A, Morrison Construction, AWG Project Investments, Barlow Handling.

List of Contents

1	INTRODUCTION
1.1	DEVELOPMENT OF PRIVATE FUNDING FOR PUBLIC SERVICES - INITIAL STAGES
1.2	THE NEW LABOUR GOVERNMENT IN 1997
1.3	THE MAY 2001 ELECTION AND THE LABOUR PARTY MANIFESTO
1.4	MOD AND PFI
2	EXECUTIVE SUMMARY
3	ECONOMIC BACKGROUND
3.1	GDP
3.2	INFLATION & INTEREST RATES
3.3	UNEMPLOYMENT & CONSUMER SPENDING
3.4	CONSTRUCTION
3.5	STERLING
3.6	CONCLUSIONS
4	UK DEFENCE SPENDING AND MAIN DRIVING FACTORS
4.1	DEFENCE BUDGETS
4.2	STRATEGIC DEFENCE REVIEW
4.3	ACQUISITION AND PROCUREMENT
4.4	PUBLIC PRIVATE PARTNERSHIP
4.5	KEY COMPONENTS OF DEFENCE ACQUISITION
5	USE OF PFI IN MOD
5.1	THE PHASES OF MOD PFI PROJECTS
5.1.1	Feasibility
5.1.2	Procurement
5.1.3	Contract Management
5.2	BENEFITS OF PFI TO MOD
5.3	MOD SIGNED PFI CONTRACTS
5.3.1	Signed PFI Contracts 1995 to 1997
5.3.2	Signed PFI Contracts 1997 to 1999
5.3.3	Signed PFI Contracts 1999 to 2001
5.3.4	Signed PFI Contracts 2001/02
5.4	MOD PFI CONTRACTS IN PROCESS OF NEGOTIATION
5.4.1	Preferred Bidder
5.4.2	PFI Contracts at ISOP/Convergence Stage
5.4.3	PFI Contracts Currently Under Negotiation
5.5	CONTRACTS WITH POTENTIAL FOR PFI SOLUTION
5.6	PFI PROJECTS CURRENTLY ON HOLD
5.7	PRIVATE SECTOR INVESTMENT IN DEFENCE
6	MAJOR ISSUES
6.1	DEFENCE EVALUATION RESEARCH AGENCY
6.1.1	Areas of Operation
6.1.2	Issues Concerning the Privatisation of DERA
6.1.3	Strategic Defence Review
6.1.4	Public Private Partnership
6.1.5	Major Issues
6.2	POTENTIAL FOR FRAUD
6.3	ENSURING BEST VALUE FOR TAXPAYERS MONEY
6.3.1	The Public Sector Comparator
6.4	FAIR COMPETITION
7	CASE STUDIES
7.1	THE PROCUREMENT OF NON-COMBAT VEHICLES FOR THE RAF
7.1.1	Contract
7.1.2	Key Issues Raised
7.1.3	Benefits and Lessons Learned
7.2	DEFENCE FIXED TELECOMMUNICATIONS SYSTEM
7.2.1	Contract
7.2.2	Key Issues Raised
7.2.3	Benefits and Lessons Learnt
7.3	TRAINING ADMINISTRATION AND FINANCIAL MANAGEMENT INFORMATION SYSTEM (TAFMIS)
7.3.1	Contract
7.3.2	Key Issues Raised
7.3.3	Benefits and Lessons Learnt
7.4	MEDIUM SUPPORT HELICOPTER AIRCREW TRAINING FACILITY (MSHATF)
7.4.1	Contract
7.4.2	Key Issues Raised
7.4.3	Benefits and Lessons Learnt
8	KEY SUPPLIERS
8.1	COMPANIES
8.1.1	AMS - Alenia Marconi Systems
8.1.2	CAE Systems
8.1.3	Flagship Training
8.1.4	Integris
8.1.5	Reflectone
8.1.6	EDS
8.1.7	Aviation Training International
8.1.8	FBS Ltd
8.1.9	Bombadier Services
8.1.10	Amey plc
8.1.11	Kvaerner A.S.A
8.1.12	Morrison Construction
8.1.13	Barlow Handling
8.2	FINANCIAL INSTITUTIONS
8.2.1	Bank of Scotland
8.2.2	Dai-Ichi Kangyo Bank, DKB
8.2.3	Hypo-Vereinsbank, HVB
8.2.4	Barclays Plc
8.2.5	The Royal Bank of Scotland, RBS
9	INTERNATIONAL PERSPECTIVE
9.1	COLLABORATIVE PROCUREMENT PROGRAMMES
9.2	MOD INVOLVEMENT IN MULTI-NATIONAL DEFENCE CO-OPERATION
9.2.1	Existing MNDC
9.2.2	Benefits and Risks of MNDC
9.2.3	Possible Future Developments for MNDC
9.3	EUROPEAN DEFENCE
9.3.1	EU Common Security Policy
9.3.2	EU Defence Structures and Strategic Defence Policy
9.4	POTENTIAL FOR USE OF PFI IN THE INTERNATIONAL DEFENCE ARENA
10	FUTURE PROSPECTS
	APPENDICES
APPENDIX 1.	THE FEASIBILITY STAGE OF MOD PFI CONTRACTS
APPENDIX 2.	THE PROCUREMENT PHASE OF MOD PFI CONTRACTS
APPENDIX 3.	THE CONTRACT MANAGEMENT PHASE OF MOD PFI PROJECTS
APPENDIX 4	GLOSSARY OF TERMS

Tables and Charts

Text © 2002 AMA Research

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Last updated by Amanda Porteous 2002