Government watchdog attacks DSS for failing to curb excessive adviser charges on £150m project.
The National Audit office is to publish highly critical comments about a government department that paid out excessive fees to advisers on a £150m private finance initiative project.

The public spending watchdog makes its comments in a draft report on the procurement of the Department of Social Security's Tyneside headquarters, where funding problems added between six and nine months to the construction timetable. The NAO says this delay increased the department's legal bills by six or seven times what was budgeted for.

The report, to be published in the spring, says that milestones should have been set and fees capped in the 18 months between the selection of Amec as preferred bidder in June 1996 and financial close.

A Whitehall source said: "Caps on fees are a big lesson. That, and the need to use more standardised forms of contract to prevent the enormous amount of drafting the lawyers put into this deal." Problems arose with funding the project and the amount of legal work it required.

Funding was to be arranged for Amec by Bankers Trust. The two struggled for months to get a bond issue off the ground before Amec eventually decided to opt instead for funding from Royal Bank of Scotland.

Amec and DSS financial adviser investment bank Dresdner Kleinwort Benson declined to comment .

It is understood that Amec is not criticised for its part in the funding problems, but that the DSS is. The Whitehall source said the audit office believes the DSS should have exercised tighter control of the funding process.

Caps on fees are a big lesson. That, and the need for more standardised forms of contract. Whitehall source

The source said that the department's legal advisers started with fixed fees but that these were quickly overshot when the complexities of the deal became apparent and the scope of their work changed. From then on, advisers charged according to the time they worked.

Solicitor Masons, in particular, was occupied with arranging the penalties Amec would have to pay if the Sir Michael Hopkins-designed buildings fell short of the required standard. As this was the first major PFI accommodation project, these had to be assessed in detail.

Susan Owen, a partner at Masons, said: "We have seen the NAO report but we'd rather not comment.

Fee-charging is an issue between us and the client." The Whitehall source said that, if the project had been procured through traditional means rather than by the PFI, it would have taken only six months to reach financial close, but would not have transferred enough risk to Amec.

The source said that the Tyneside deal had not compared favourably with another assessed by the NAO. This was the PRIME project, which involved the transfer of hundreds of DSS benefit offices to the private sector. He added, however, that PRIME did not have to manage the risk associated with a new-build project.