The decision to link IT and commercialisation
5. IT impacts on practically all aspects of the Agency's
work including the control and monitoring of radio usage and the
allocation of radio spectrum to users. It is also a key element
in the Agency's research and development work aimed at extending
the usable spectrum as new technologies develop and at making
greater use of the existing spectrum. By 1995 the Agency had identified
the need for immediate and substantial investment in IT systems
to meet users' expectations, on the basis of forecasts of continued
growth in the demand for radio spectrum.
6. The Agency were, however, unable to recruit and
retain sufficient IT staff of suitable quality. In 1996 they estimated
that almost half of the 90 or more staff they needed to support
their IT activities would need to be contract staff, costing three
times more than in-house IT employees.
The Agency wanted a solution that gave them resources to provide
and develop IT systems within a relationship that was more forward-looking
than was possible through the direct use of contractors.
7. The Agency considered entering into an arm's length
outsourcing agreement but decided that a joint venture with a
private sector IT supplier would be the best option. A joint venture
could give them the necessary resources at reduced cost, and could
provide them with the influence they sought over the provision
of IT services. In particular, a joint venture would allow their
engineers, who had developed a number of IT systems, to continue
modifying them in response to developments in radio spectrum technology.
The Agency said that outsourcing would have risked attracting
bids from companies that were mainly interested in providing routine
desktop services rather than the specialist services the Agency
8. The Agency also wished to have the potential for
flexibility in the delivery of IT services. The radiocommunications
industry was going through a period of change and the joint venture
would need to be sufficiently flexible to deal with changes in
technology and economic and regulatory regimes.
The Agency said they would advise other public bodies to maximise
flexibility in such contracts because IT is such a fast moving
area. The Agency consider that their deal with CMG allows substantial
re-negotiation on the basis of a long-term arrangement in which
both parties' incentives are aligned.
9. At the time when the Agency were considering seeking
a partner for the delivery of IT services they were receiving
many requests from other countries for assistance in radio spectrum
management issues. They decided that there was scope to exploit
commercially their expertise in overseas markets. The Agency did
not, however, carry out an in-depth assessment of the market for
their commercial expertise or prepare a detailed business proposal
to present to potential partners.
10. The Agency concluded that, as their effectiveness
in radio spectrum management was dependent upon their information
systems, the provider of these systems would be well placed to
market them internationally. The provider would be familiar with
the Agency's business and would therefore be able to market not
just the information systems but also the Agency's expertise.
The Agency therefore decided to include in the partnership the
commercial exploitation of their systems and expertise.
11. Questioned about the benefits of linking the
delivery of IT services and commercial exploitation of the Agency's
systems and expertise, and whether there might have been some
advantage in having a separate partner for the overseas marketing
operation, the Agency said that there was synergy between the
two activities and they wanted to avoid a situation where two
companies could be competing with each other for business. They
considered that having one partner for both activities would help
them build on their status as a world leader in spectrum management.
The procurement process
12. The Agency initially attracted 56 expressions
of interest in the project from private sector companies. From
the 22 that replied to a follow up questionnaire, the Agency selected
a long list of 12 potential bidders. Six of these responded to
an outline specification of what the Agency wanted. Ultimately
only two bids were received, one of which did not meet the Agency's
requirements and was therefore rejected.
13. A number of bidders and potential bidders withdrew
because the Agency required the supplier of IT services to enter
into a joint venture to exploit the Agency's expertise. Another
factor that reduced interest was the Agency's initial proposal
that they should hold a controlling interest in the joint venture
company. When asked
why they persisted with their joint venture proposal when they
saw the extent to which bidders backed away from it, the Agency
said they preferred the idea of a joint venture because they were
concerned to have available resources on which they could rely
to provide IT systems and to develop new IT systems. The use of
contractors on an individual basis had not given them a forward
looking relationship and, in their view, outsourcing would not
have attracted bidders capable of providing the specialist services
that they needed. This remained their view despite the difficulties
14. The Agency originally envisaged that securing
a partner would take 13 months. It eventually took 32 months and
a number of factors contributed to the delay. Occasionally it
took senior management months to approve documents. Senior management
in the Agency had other priority tasks, including progressing
new legislation, and the Agency had to relocate their headquarters
following the destruction caused by the London Docklands bombing
in February 1996.
Delays also arose because of disagreements about how the transaction
should be implemented.
The Agency's then Chief Executive took responsibility for running
the project with a board which included representatives from within
the Agency and a number of external advisers. The Agency said
they were in an experimental period, and there were a lot of discussions
with other parties which took time to conduct.
15. The project was run separately alongside the
main work of the Agency. The Agency said that if they were doing
the project again they would want the senior management of the
Agency to be fully integrated into the project because it was
so fundamental to the way the Agency worked.
16. The Agency initially estimated that it would
cost £550,000 to find a partner. In fact it cost £3.4
million. Of this approximately £2 million was paid to advisers.
The Agency admitted that their initial estimates were unrealistic
and they had under-estimated how difficult the procurement would
be. They had learned lessons which they had applied in their budgetary
control systems generally and in project management. They understood
the importance of cost estimates being robust at the beginning
and had since introduced rigorous controls over expenditure, the
forecasting of expenditure and the allocation of expenditure to
costs. They were nevertheless confident that expenditure during
the project was properly monitored, by three independent members
of the procurement team, and was incurred on legitimate activities
associated with the procurement.
Deciding on the size of the public sector's shareholding
17. In their specification for the partnership the
Agency told potential bidders in April 1997 that the Agency would
take the majority shareholding in the joint venture company. A
subsequent review found that the company would then be classified
as a public sector body subject to the normal range of Government
accounting policies and requirements, which potential private
sector partners did not find compatible with the pursuit of commercial
enterprise. The Agency decided at a late stage that establishing
the joint venture company as a public sector body would introduce
delays to the procurement and decided to take a non-controlling,
30 per cent, interest in the joint venture company.
18. In taking a 30 per cent holding, the Agency were
trying to secure a sufficient percentage of the whole company
to ensure that they had sufficient influence over what happened.
They needed to have a shareholding of more than 25 per cent to
ensure that CMG could not restructure the company without their
consent. They wished to have less than 50 per cent to free the
company from public sector restrictions, and so allow it to move
fast in the marketplace and have the commercial freedom it needed
for meeting the Agency's demands as customers. The Agency added
that a large number of provisions in the contract gave them good
control over the business even if they did not have a controlling
19. The Agency said that there had not been any significant
financial consequences from the decision to take a 30 per cent
shareholding. The profit of the company is shared in proportion
to their shareholding. The profit in 1999 was £740,000 and
their share was £241,000. Even if the Agency had received
50 per cent of the profits it would have been relatively small
compared with the volume of business undertaken by the project.
When asked whether the new international business, if it took
off, could realise profits which would make their share more significant,
the Agency said that they might have had difficulty in persuading
CMG to share profits more equally while also bearing all the downside
risk of the international business.
20. In relation to the decision to take a minority
stake in the company had not been taken before the final specification
was sent out to potential bidders, the Agency said that they had
been feeling their way in a new venture. It was not clear to them
that the private sector firms were reluctant to be minority partners
in the company. When they decided to take a minority shareholding
they notified the bidders who had withdrawn from the competition
but none came back.
21. The Agency established sufficiently flexible
arrangements with their joint venture partner to enable IT systems
to be developed that were not envisaged when the contract was
signed. Particularly in a developing area like IT, joint venture
agreements need to be sufficiently flexible to permit change in
the light of new opportunities and requirements.
22. One reason why the Agency linked the delivery
of IT services and the marketing of expertise in one venture was
the synergy they expected between the development of new systems
and their marketing internationally. This linkage did however
deter a number of potential bidders, ultimately leaving only one.
In seeking to interest the market in innovative business opportunities,
departments should endeavour not to impose a preconceived business
model that might unduly limit the scope for worthwhile proposals.
23. Delays arose during the project, some of which
could have been reduced. For example, there was an initial lack
of clarity about the project's objectives, and it was given insufficient
priority by senior management. The Agency could also have focussed
earlier on whether to seek a majority or minority shareholding.
24. The cost of securing a partnership was substantially
greater than had been budgeted. The Agency had inadequate procedures
for controlling, forecasting and allocating costs, though they
said that these had since been improved.
4 C&AG's Report, para 1.5 Back
C&AG's Report, paras 1.6-1.8 Back
C&AG's Report, para 1.11 Back
C&AG's Report, para 1.15 Back
C&AG's Report, paras 1.17, 1.20-1.21 Back
ibid, paras 1.17, 1.22 Back
C&AG's Report, paras 2.9-2.11, 2.14-2.15 Back
ibid, paras 13-14; Evidence, Qs 38-39 Back
Qs 1-2 Back
C&AG's Report, paras 9, 2.26; Evidence, Qs 28, 48 Back
ibid, paras 2.3-2.8; Appendix 3 Back
Qs 29-36 Back
Qs 45, 64 Back
C&AG's Report, paras 2.22-2.23 Back
Qs 10, 23 Back
Qs 11, 22, 54 Back
Qs 12, 58 Back
Qs 36-39 Back