One of the largest outsourcing operations undertaken by the government has resulted in an improved level of service, the National Audit Office has concluded.

Parliament's spending watchdog found that the public-private partnership deal between National Savings and Investments (NSI) and Siemens Business Services has led to savings for the taxpayer.

But the NAO also concluded that Siemens and NSI had underestimated the challenges involved in the project.

As a result, a number of problems had been encountered which mean the company is unlikely to make its projected returns on the project.

However, Siemens Business Services is said to remain committed to the contract and is meeting 98 per cent of its performance targets.

In April 1999, NSI transferred its operations to Siemens in what was one of the largest Whitehall outsourcing projects. Before April 1999, NSI employed some 4100 staff and incurred running costs of some £180 million a year for the Treasury.

The NAO found that in 2001/02 NSI had saved the taxpayer £176 million, partly because of the deal with Siemens.

Key risks accepted by Siemens Business Services meant that it had incurred more capital expenditure than planned, and despite increasing productivity it had been unable to reduce staff numbers in line with its original plans. It is also spending more than expected on the upkeep of three sites at Blackpool, Durham and Glasgow.

"Siemens Business Services underestimated the challenge of transforming NSI's old business and found existing processes were complex and difficult to change. It encountered a number of problems when it began to transfer NSI products from legacy systems to a new IT platform," found the NAO.

"This report shows that there are alternatives to bailing out the private sector. NSI and Siemens Business Services have learnt valuable lessons in the operation of this project, which are pertinent to other public-private sector partnerships," said NAO chief Sir John Bourn.

"A whole business approach, where decisions are based on what is best for the business rather than what is best for either the public and private sectors, needs to be adopted if the public and private sectors are to achieve their objectives, and the private sector needs to recognize the management challenge that PFI represents."