5.2 Tendering is the process whereby public authorities invite tenders and select a winning bidder for the contract. Effective tendering is vital because the initial commercial terms often last throughout the life of the project. Good management requires the public authority to maintain competitive tension through to the final agreement; the development of a good solution; and establishing a fair and economic commercial basis for the contract.
5.3 The Committee of Public Accounts raised concerns in 2003 on PFI tendering, that PFI projects did not follow good practice and were not handled with sufficient skill on the part of the public sector, incurring high costs and risking VFM.75 We undertook a cross cutting study on the tendering of PFI projects in 2007. We found that key elements of the tendering process had not improved and in some respects had worsened.76
5.4 Most PPPs, including all PFIs, are now tendered using the EU defined tendering process known as Competitive Dialogue. Prior to 2006, they used Negotiated Procedure, which was very similar. These processes involve the bidders developing the technical solution to the public authority's output specification in conversation with the public authority. PPP tendering thus involves both the selection of contractor and the full design of both the asset and service specification.
5.5 Tendering can be a long process. PFI projects finalised between 2004 and 2006 took an average of 34 months to tender.77 The comparable figure for 2000-03 was 33 months. Large PPPs can take even longer and there is a lot of variation by sector. Defence PFI projects take a particularly long time, averaging 45 months and lasting up to 10 years.78 Although there needs to be sufficient time for tendering in order to get things right, we found that many of the reasons for long tendering periods could be avoided or mitigated.79
5.6 The costs of tendering for both the public and private sectors reflect the length of tendering. Contractors often tell us that high bid costs prevent them from bidding for more projects.
5.7 There is a healthy number of contractors in the PFI and PPP market, but the number of bidders for each project is falling. Eighty five per cent of pre-2004 projects received three or more developed bids compared to 67% for 2004-06 projects.80
5.8 VFM is most at risk during the final stage of negotiations, when negotiation is with a single preferred (or final bidder) and competitive tension is at its weakest. We found that preferred bidder negotiations lasted on average 15 months for PFI projects finalised between 2004 and 2006. One in three of these projects changed the value of the contract (both upwards and downwards) by an average of 17% of the total project value.81
5.9 The introduction of Competitive Dialogue in 2006 was designed to eliminate changes made after the selection of the final bidder. Our recent study on Building Schools for the Future found some early indications that at least some changes are still being made late in the process. Kent County Council's project experiencing seven months delay after the selection of final bidder.82
5.10 Strategic infrastructure partnerships are a relatively new type of PPP designed to manage the flow of projects and handle the private sector's capacity. They are long term partnerships between public authorities and a consortium of companies that have exclusive rights to develop a stream of projects. Once the partnership has been established, each project is developed without a competitive tender. Benchmarking information is used to keep the costs economic compared to the market average. It is hoped that this will be cheaper than separately tendering for each project, because the cost of tendering is reduced and the partners have the opportunity to learn how to work with each other better. We found that it was too early to tell if it will provide VFM.83
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75 Delivering better value for money from the Private Finance Initiative, PAC (HC 764, 2002-03).
76 Improving the PFI Tendering Process, National Audit Office (HC 149, 2006-07).
77 Improving the PFI tendering process, National Audit Office (HC 149, 2006-07).
78 Allocation and management of risk in Ministry of Defence PFI projects, National Audit Office (HC 343, 2007-08).
79 Improving the PFI tendering process, op.cit. The Building Schools for the Future Programme: renewing the secondary school estate, National Audit Office (HC 135, 2008-09).
80 Improving the PFI tendering process, op.cit.
81 Improving the PFI tendering process, op.cit. The Building Schools for the Future Programme: renewing the secondary school estate, National Audit Office (HC 135, 2008-09).
82 The Building Schools for the Future Programme: renewing the secondary school estate, op.cit.
83 Ibid.