FT.com
Qinetiq consortium denies £1.3bn hole
By Jeremy Lemer
Published: July 5 2009 22:41
The consortium behind a £12bn training programme for the military, one of Britain’s largest private finance initiatives, has denied that there is a £1.3bn hole in the project’s funding.
According to a Ministry of Defence
memo leaked to Mark Pritchard, Conservative MP for The Wrekin, crisis talks were held at the department last month to discuss a plan to centralise technical training in Wales.
“Currently there is a £1.3bn affordability issue in the programme; the problem is borrowing money at a reasonable rate for PFIs,” the memo says.
But Metrix, the Qinetiq-led consortium behind the scheme, said the affordability issues had been resolved and separate negotiations with banks were at an early stage.
Since it was awarded in January 2007, the 25-year programme
(privatise military training)to concentrate specialist engineering and IT training at St Athan in the Vale of Glamorgan has been repeatedly delayed and much criticised.
The MoD has admitted that agreeing an affordable contract has been moredifficult than expected.Meanwhile, the credit crunch has taken its toll. Last year turmoil in the
debt markets forced Metrix to drop plans for a £1bn bond issue.
Both sides insist that the ambitious project remains on track and the final
decision on whether to go ahead will be pushed back until after the summer
parliamentary recess.
The delay would “allow further analysis ... in order to ensure best value
for money”, the MoD said.
Government has offered Metrix an additional £44m of state guarantees – in effect promising to pay for preparatory work even if it scraps the deal.
Metrix has called its “fallback” plan “part of good project governance”.
So far the MoD has offered almost
£100m of guarantees to Metrix.Metrix said the guarantees gave it the “confidence” to move ahead with vital
preparations for construction and training, and would allow building to
start in the autumn of 2010.
Copyright The Financial Times Limited 2009
An MoD spokesperson:
Underwriting the cost of this project is sensible and prudent
business practice and is focused on risk reduction activity.
Rosalind Britton-Elliott
Press Officer - Policy Desk
Ministry of Defence
T: 020 7218 5903
DEPARTMENTAL MINUTE DATED 26 JUNE 2009 CONCERNING THE REPORTING
OF A CONTINGENT LIABILITY FOR THE COSTS ASSOCIATED WITH THE
DEFENCE TRAINING REVIEW
It is normal practice, when a Government Department proposes
to undertake a contingent liability in excess of £250,000 for
which there is no specific statutory authority, for the
Department concerned to present to Parliament a Minute giving
articulars of the liability created and explaining the
circumstances; and to refrain from incurring the liability
until fourteen Parliamentary sitting days after the issue
of the Minute, except in cases of special urgency.
The Defence Training Review Package 1 Project is a large
and complex Private Finance Initiative project, with the
Metrix Consortium as Preferred Bidder. It seeks to transform
the way the Ministry of Defence (MOD) delivers specialist
engineering and communications and
information systems training on a Defence wide basis to support
better the future needs of the Armed Forces.
In January 2008 and February 2009, Departmental Minutes
were laid before Parliament outlining an initial contingent
liability for the underwriting of elements of Pre-Contract activity
with Metrix. These existing Pre-Contract Agreement Letters
PCAL1 and PCAL1a),underwrite risk reduction activity up to a
maximum value of £49.9M.
At the time this was considered sufficient to carry the
project to the main investment decision point, however,
whilst PCAL1 and PCAL1a achieved
their strategic objectives in generating the momentum
necessary to establish an affordable and acceptable
programme, further risk
reduction activity is necessary to mature the deal and
maintain the mobilisation of Metrix resources to ensure
the most effective programme to the point at which
the Contract is let.
In order to maintain this momentum another,
further, package of risk reduction activity (PCAL2)
valued at £43.793M is proposed. This
work is predominantly focused around the design and
planning of the estate solution at St Athan, and further
development of the training solution.
Undertaking these activities ahead of the main investment
pointwill enable Metrix to start construction at St Athan on
time in August 2010. Further development of the training
solution will build customer confidence in the training solution,
allowing quicker and more efficient drawdown of military
manpower after Financial Close.
The costs of these risk reduction activities are to be recovered
through the tendered contract and are already captured within
the Metrix price. Provided that the Programme reaches
Financial Close,the costs will be paid from within the
planned budget at no additional charge to MoD.
The MoD will only become liable to
reimburse the underwritten value of these costs if there
is a failure to achieve Financial Close for a reason not
attributable to Metrix. This commitment will be subject to a
clear Limit of Liability, in total and by specific activity area,
with any reimbursement of costs subject to
verification of actual costs incurred supported by open book
provisions. Initial commitment will cover a 3 month period and be
subject to a reduced Limit of Liability. Although subject to
negotiation, this initial limit is expected to be no more than
15M reflecting the rate of resource consumption required to
support planned activities in this period. Should this
liability be called,provision for any payment will be sought
through the normal Supply procedure.
There is also a requirement for MOD to deliver a clear site at St Athan
before construction work can begin.
The Welsh Assembly Government
(WAG) have agreed to fund clearance of the site,
with a pre-Financial Close maximum expenditure
of £12.5M. WAG is, however, unwilling to
start work prior to Financial Close unless this
work is underwritten by
MOD lest the Defence TrainingCollege
fails to reach Financial Close.
The Treasury has approved the proposal in principle. If,
during the period of fourteen Parliamentary sitting days
beginning on the date on which this Minute was laid before
Parliament, a Member signifies an objection by giving notice
of a Parliamentary Question or by otherwise raising
the matter in Parliament,
final approval to proceed with incurring the liability will be
withheld pending an examination of the objection.
MINISTRY OF DEFENCE
