Revenue contract will be funded with taxpayers' money as PPP

The largest public private partnership (PPP) technology contract ever established will be funded using mostly public money in a...

The largest public private partnership (PPP) technology contract ever established will be funded using mostly public money in a significant departure from the Government's preferred route of using private finance.

Detailed plans for Inland Revenue's PPP, the first of its kind and worth up to £4bn, were leaked to Computer Weekly as Tony Blair used the Labour Party conference to restate his commitment to using private funds instead of public money to finance major schemes. "There is no way the Government, through the general taxpayer, can do it all," he said.

Inland Revenue's PPP for private sector partners to run systems that help to collect more than £100bn a year in tax and national insurance contributions, appears to be directly at odds with the Government's policy because it relies mainly on government money for a massive new investment programme.

In a contract that could last up to 18 years, Inland Revenue is expected to require a raft of new systems, including the replacement of the UK's main PAYE tax system, which dates back decades and has records on about 29 million people.

An official publication, Public Private Partnerships - The Government's Approach, says that one aim of the scheme is to "harness the innovation and disciplines of the private sector, by introducing private sector investors who put their own capital at risk".

In previous IT PPP and private finance initiative (PFI) deals technology suppliers have invested their own money in new technology and did not begin to recoup their costs or make a profit until the new systems were delivered, when a regular service fee was charged.

But Computer Weekly has learnt that the Revenue's PPP, called Aspire, will blend old-style public financing with some risk-transfer principles borrowed from PFI.

Whoever wins the Revenue contract, which is due to be awarded in December 2003, will acquire the ownership of the department's assets, including hardware, networks and intellectual property rights in more than 100 major software applications.

Another conventional PPP aspect of Aspire is that the department will transfer ownership of its legacy systems to the supplier and pay a fee to buy services back for government. The contract will also cover the cost of maintaining newly built systems that go live during the life of the contract.

What is not conventional is that the Revenue's crucial development programme will be funded mainly from public funds, instead of private sector financing.

Suppliers will receive payments at critical stages of development, but just to cover their costs. Only if the system is seen to be working satisfactorily several months into the contract will the supplier be paid its profit.

If the project fails, the Revenue can claim back its costs and refuse to pay the supplier its profit margin.

This arrangement addresses one of the key criticisms of PFI - that the supplier borrows capital at higher rates than normal public borrowing which is then charged back to the public purse through service fees. Under the new scheme, the Government can borrow the investment capital at a lower rate, while the supplier still takes some of the risk.

A further advantage for the Revenue is that, by paying for software development, it has better independent oversight of the progress of the supplier's work.

A Revenue spokesman said, "The Aspire contract will be a PPP and reflect government thinking in this area. The Government's approach recognises that there are a number of partnership models and is continually looking to develop new types of partnership with the private sector."

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