MoD refurbishment costs £100m extra

The PFI scheme to refurbish the Ministry of Defence's headquarters is costing almost £100m more than originally budgeted because it took civil servants 16 months to close the deal.

A damning report into the Whitehall project published today by the Commons Public Accounts Committee also reveals that the deal, signed four years ago with a consortium including the beleaguered contractor Amey, is only expected to produce savings of £100,000 over its 30-year life.

When the Modus consortium was selected as preferred bidder in January 1999 the cost of the refurbishment was put at £647m and the MoD expected to save £25m compared with the cost of undertaking the refurbishment as a conventional public sector contract.

By the time the deal closed in May 2000 the cost had mushroomed to £746m, mainly because the financial markets had "seen the MoD coming" and pushed up the debt financing costs by £60m.

Costs rose another £40m because a full survey of the building was not undertaken until after Modus had been selected as preferred bidder and the MoD did not hedge against the possibility of financing charges rising after it was decided to fund the scheme though bank finance rather than bonds. The MoD also discovered the refurbished building, which is due to reopen in 2004, would not be big enough to house an additional 500 central London staff so it had to enter into a separate contract to provide offices for these civil servants.

The PAC said: "Closer attention to financing costs would have been particularly helpful during the 16 months it took the MoD to close the deal. Reducing the length of that period, postponing the choice of finance to the end to get the cheapest form available and a cannier approach to the financial markets prior to closing the deal all might have helped to secure savings of this project."

Edward Leigh, the committee chairman, said it was "false and spurious" for the MoD to present its estimates of the cost savings as accurate, when the difference was a mere 0.01 per cent of the final contract price.

The MoD defended the deal on the grounds it was a fixed price contract, so cost overruns would be passed to the contractor, but the PAC said it was not clear that current financing methods for PFI deals were the most efficient or cheapest or that risk transfer need necessarily mean costly private financing.