5.7 If at any stage the procurement team identifies market failure (e.g. absence of competition), they should consider the implications for the project. Market failure or lack of competition occurs where there is only a single bidder for a project or perhaps where there are two or more bidders but only one is considered to be credible. The concern is that in the absence of competitive tension the bidder may not be appropriately incentivised to offer its best price, terms and conditions to the public sector. In this case market abuse might arise. Market abuse can be defined as a situation where the bid offered is out of the market, that is to say above the market price for similar projects, or where the risk profile has been substantially eroded relative to other similar recent PFI projects at this price.
5.8 In view of this it is unlikely that the project will deliver VfM unless other steps can be taken to secure VfM. However, a procurement should not automatically be stopped as a result of market failure. The department and the procuring authority should undertake a thorough review of the circumstances of the particular project in reaching their view on the way forward. If it is not possible to take appropriate additional action that satisfy the accounting officer then the procurement should be halted.
5.9 In considering whether the procurement should continue, the reason for the market failure should be examined closely. The team should establish whether the failure of competition is due to systemic problems in the market, in which case the failure should equally affect an alternative procurement route. In this case the procuring authority would probably wish to look at what additional protections might be put in place whilst allowing the current procurement to continue. Alternatively, the failure of the competition could be due to:
• concerns in the bidding community about the procuring authority's commitment to the project, or the skills or experience of their procuring team, in which case the procuring authority and department would need to consider as a matter of priority how to address these concerns; or
• sponsors who have overextended and found themselves shortlisted for too many projects have decided to withdraw from one or more projects.
In any event it is imperative to thoroughly explore the reasons for the market failure.
5.10 It would be difficult, and inappropriate, to provide a set of definitive rules to follow in the event of market failure. It is inevitable, and appropriate, that each case should be considered on its merits. It is however possible to identify some general principles that should be adopted:
• if the market failure occurs early on in the procurement process (i.e. before bids have been received), the procurement should be halted unless there are systemic market failures which would equally affect any alternative procurement route;
• where failure occurs after bids have been received, the procuring authority will wish to consider the strength and quality of the remaining or only credible bid, and will need to consider the extent to which the competition has been able to drive out and demonstrate VfM; and
• in any circumstance where a procuring authority considers it is appropriate to continue with a single bidder it should ensure there is transparent competition in the bidder's supply chain. Benchmarking is not an adequate alternative to market testing. If the bidder will not agree to market testing of its subcontracts, the procurement is unlikely to deliver VfM and should be halted.
5.11 There are many reasons why only a small number of bidders might express interest in particular projects. There is no substitute for procuring authorities and sponsoring departments jointly examining the circumstances surrounding a particular project and determining the characteristics that will demonstrate that a strong competition is taking place.
5.12 Departments must discuss all potential single bidder situations with HM Treasury as early as possible in the procurement process.