MoDern buying
The Ministry of Defence (MoD) has traditionally been one of the
UK's departments with the closest relationship to the private
sector. But civil servants are now adapting the PFI process to the
larger orders that might include a private sector management
element.
Since 1996 over 75% of MoD deals done have been under the general heading of property, either as training facilities or accommodation: the first deal was the provision of the Army White Vehicle Fleet, a £52 million ($86 million) contract to provide support equipment in Germany.
Subsequent projects, at least the larger-ticket deals, have revolved around the forces' training facilities and accommodation. The parallels with other PFI structures, where the concession holder undertakes both newbuild elements and the associated facilities management, are clear. From the point of view of the military, the greatest challenges lie with integrating security concerns and its own ethos with existing facilities management (FM) agreements.
Simulator equipment, both for Army and Royal Air Force personnel, has been another opportunity for high-tech sponsors to become involved with PFI. The largest deal done so far has been for the Apache Attack Helicopter Training facility, the size of which has been estimated at between £165 million and £247 million, depending on how much of the FM payments has been included. The sponsors, Boeing and GKN Helicopters, awarded the mandate to Royal Bank of Scotland, Bayerische Landesbank and HSBC. The banks assembled a £185 million term loan, a £40 million subordinated bridge, a £20 million standby facility and a £5 million letter of credit.
The Ministry is keen to underline that PFI remains just one approach that can be used for asset acquisitions. However, Peter Ryan, the head of the MoD's PFI/PPP unit does think that concrete steps have been taken towards a change in culture: ?What you're seeing now is widespread acceptance of the suitability of PPP approaches to some of our requirements. People are understanding that ownership isn't the only issue?.
The first of this newer type of procurement venture to come to the market is likely to be the Joint Rapid Reaction Roll-On Roll-off Ferry deal (Ro-Ro). This involves the provision of ferries that can be kept at a state of readiness to carry troops and equipment to conflict areas. It is the project most closely associated with the recent Strategic Defence review, which attempted to set out a list of requirements and priorities in terms of forces' strength.
The expected contract will include newbuild elements and an availability fee to be made to the operators so that suitable and inexpensive shipping can be made available to the MoD quickly. The boats would be kept at varying degrees of readiness and the successful operator would be able to use them commercially the rest of the time.
However, the deal is subject to intense political lobbying. Procurement rules now state that the tender process should be open to foreign bidders. Indeed, most of the four pre-qualified bidders (Novomar SA, Maersk, Andrew Weir Shipping and the Sealion consortium made up of Bae Systems and ferry operator Stena) have included a proposal to build the new capacity abroad. But the UK shipping industry is in a perennially fragile state, and the pressure is on the government to choose a deal that would maintain employment in UK shipyards. Belfast's Harland & Wolff, reeling from the imminent loss of a cruise liner contract with Cunard, would be one grateful recipient of the work.
It is unclear how much of an impact the campaigning would have on the tender process. There have been constant assertions from the Ministry of Defence that value for money has to be the prime driver. And recent criticism of the Blair government's attitude to industrial support means that the result of the tender process will be keenly pored over for evidence of a firm commitment to the new guidelines.
It is criticism, however, that the MoD has faced in the past over its attitude to its suppliers. The ?revolving door? situation, where the boundaries between defence industry personnel and procurement officers became increasingly blurred, was one avenue of criticism. The MoD is only too grateful to redefine its relationships here. Says Ryan, ?Since the end of the Cold War we've seen a rapid consolidation of the defence market. If we had confined ourselves to this shrinking pool of suppliers we might not have got the best value for money. It's an interesting shift ? there are more players able to do business with us?.
In part this ability to make deals has stemmed from a reassessment of equipment priorities. The frantic pace of Cold War one-upmanship in equipment has largely abated, and the MoD can look at support areas that might have been neglected, particularly its property estate. When to this is added the Defence Training Review, which calls for a rationalisation in training structures, the ability of facilities management players to become involved is clear.
The effect of these big-ticket financings on the PFI bank market is not yet clear. The MoD has taken on KPMG as financial advisers and has been in talks with potential sponsors before a formal invitation on possible financial structures. ?We are extremely confident that these deals can be financed in the market, both individually and cumulatively?, says Ryan. He does acknowledge, however, that a little stimulation might be needed in exceptional cases.
One of these is the SkyNet satellite deal. Estimated to cost up to £5 billion, it is taking a while to emerge with a formal structure, and has been overtaken both by the Ro-Ro deal and the Future Strategic Tanker Aircraft (FSTA) deals. Given the complexity and financiers' current wariness with regard to satellite deals, this is probably understandable.
It is far too early, however, to talk of front-line equipment being financed in this fashion, either because the contracts are unsuitable or because of the nightmare of security-taking issues that are likely to ensue. The other big procurement project of the moment, the Eurofighter, will go forward on normal, contract to supply lines.
PFI will probably remain responsible for about 6% of MoD asset creations, and it is still not clear whether there is going to be a marked improvement in the speed it takes to get these deals concluded. However, as most of the participants in this developing process agree, there is still a lot of learning to do.
Since 1996 over 75% of MoD deals done have been under the general heading of property, either as training facilities or accommodation: the first deal was the provision of the Army White Vehicle Fleet, a £52 million ($86 million) contract to provide support equipment in Germany.
Subsequent projects, at least the larger-ticket deals, have revolved around the forces' training facilities and accommodation. The parallels with other PFI structures, where the concession holder undertakes both newbuild elements and the associated facilities management, are clear. From the point of view of the military, the greatest challenges lie with integrating security concerns and its own ethos with existing facilities management (FM) agreements.
Simulator equipment, both for Army and Royal Air Force personnel, has been another opportunity for high-tech sponsors to become involved with PFI. The largest deal done so far has been for the Apache Attack Helicopter Training facility, the size of which has been estimated at between £165 million and £247 million, depending on how much of the FM payments has been included. The sponsors, Boeing and GKN Helicopters, awarded the mandate to Royal Bank of Scotland, Bayerische Landesbank and HSBC. The banks assembled a £185 million term loan, a £40 million subordinated bridge, a £20 million standby facility and a £5 million letter of credit.
The Ministry is keen to underline that PFI remains just one approach that can be used for asset acquisitions. However, Peter Ryan, the head of the MoD's PFI/PPP unit does think that concrete steps have been taken towards a change in culture: ?What you're seeing now is widespread acceptance of the suitability of PPP approaches to some of our requirements. People are understanding that ownership isn't the only issue?.
The first of this newer type of procurement venture to come to the market is likely to be the Joint Rapid Reaction Roll-On Roll-off Ferry deal (Ro-Ro). This involves the provision of ferries that can be kept at a state of readiness to carry troops and equipment to conflict areas. It is the project most closely associated with the recent Strategic Defence review, which attempted to set out a list of requirements and priorities in terms of forces' strength.
The expected contract will include newbuild elements and an availability fee to be made to the operators so that suitable and inexpensive shipping can be made available to the MoD quickly. The boats would be kept at varying degrees of readiness and the successful operator would be able to use them commercially the rest of the time.
However, the deal is subject to intense political lobbying. Procurement rules now state that the tender process should be open to foreign bidders. Indeed, most of the four pre-qualified bidders (Novomar SA, Maersk, Andrew Weir Shipping and the Sealion consortium made up of Bae Systems and ferry operator Stena) have included a proposal to build the new capacity abroad. But the UK shipping industry is in a perennially fragile state, and the pressure is on the government to choose a deal that would maintain employment in UK shipyards. Belfast's Harland & Wolff, reeling from the imminent loss of a cruise liner contract with Cunard, would be one grateful recipient of the work.
It is unclear how much of an impact the campaigning would have on the tender process. There have been constant assertions from the Ministry of Defence that value for money has to be the prime driver. And recent criticism of the Blair government's attitude to industrial support means that the result of the tender process will be keenly pored over for evidence of a firm commitment to the new guidelines.
It is criticism, however, that the MoD has faced in the past over its attitude to its suppliers. The ?revolving door? situation, where the boundaries between defence industry personnel and procurement officers became increasingly blurred, was one avenue of criticism. The MoD is only too grateful to redefine its relationships here. Says Ryan, ?Since the end of the Cold War we've seen a rapid consolidation of the defence market. If we had confined ourselves to this shrinking pool of suppliers we might not have got the best value for money. It's an interesting shift ? there are more players able to do business with us?.
In part this ability to make deals has stemmed from a reassessment of equipment priorities. The frantic pace of Cold War one-upmanship in equipment has largely abated, and the MoD can look at support areas that might have been neglected, particularly its property estate. When to this is added the Defence Training Review, which calls for a rationalisation in training structures, the ability of facilities management players to become involved is clear.
The effect of these big-ticket financings on the PFI bank market is not yet clear. The MoD has taken on KPMG as financial advisers and has been in talks with potential sponsors before a formal invitation on possible financial structures. ?We are extremely confident that these deals can be financed in the market, both individually and cumulatively?, says Ryan. He does acknowledge, however, that a little stimulation might be needed in exceptional cases.
One of these is the SkyNet satellite deal. Estimated to cost up to £5 billion, it is taking a while to emerge with a formal structure, and has been overtaken both by the Ro-Ro deal and the Future Strategic Tanker Aircraft (FSTA) deals. Given the complexity and financiers' current wariness with regard to satellite deals, this is probably understandable.
It is far too early, however, to talk of front-line equipment being financed in this fashion, either because the contracts are unsuitable or because of the nightmare of security-taking issues that are likely to ensue. The other big procurement project of the moment, the Eurofighter, will go forward on normal, contract to supply lines.
PFI will probably remain responsible for about 6% of MoD asset creations, and it is still not clear whether there is going to be a marked improvement in the speed it takes to get these deals concluded. However, as most of the participants in this developing process agree, there is still a lot of learning to do.
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