8.42 The proper evaluation of bids for PFI projects is essential in securing value for money. It is important for the public sector to evaluate bids for PFI projects from the perspective of overall best value in the long term. It can be a mistake for the public sector to confuse least cost with value for money (see paragraph 8.13 and Box 8.1).
8.43 Three additional factors of significance make sound bid evaluation even more important:
• the new Green Book's unbundling of the discount rate to make separate assessments of risk and uncertainty and optimism bias mean that the public sector's evaluation of bids presented must be more rigorous, with a particular need to assess the trade off between value for money and affordability of bids;
• because the PFI market is increasingly competitive, in bidding to the public sector and in the financing terms offered by funders (see Annex C for technical details) public sector bid evaluation has to be expert and comprehensive
• enough to take into account the financial robustness of each bid, to ensure that bidders have not reduced safety margins in their financing arrangements to a level that endangers their own long-term financial stability. The public sector does not underwrite private sector partners, but it does need to ensure the long-term viability of its private sector contractors; and
• the public sector needs to consider and value the flexibility offered by different bids. Paragraphs 8.45-8.47 cover this in more detail.
8.44 To take account of these concerns, HM Treasury will be reviewing, in consultation with public and private sectors, the current effectiveness of the public sector's approach to bid evaluation. The research will look particularly at the expertise deployed by the public sector client to undertake bid evaluation and the grounds on which bids are evaluated.