15.3.2.1 It is now standard practice in most sectors of the PFI market to include some form of value testing. The recommended approach in Version 2 of this guidance was to adopt benchmarking as the preferred value testing mechanism and to use market testing only to the extent that the parties cannot agree on the outcome of benchmarking. This position has now changed.
15.3.2.2 Market testing allows a more flexible approach to the provision of Services than benchmarking because it ensures that the soft service provision for the Project can be re-assessed to match public sector requirements at the time the exercise takes place. Market testing also offers greater opportunity for transparency and competition. Accordingly, and because of a greater maturity in the soft services market, the recommended approach is to provide for market testing of soft services, as this is most likely to yield best value for money.
15.3.2.3 In certain limited circumstances however, it may not be appropriate to provide for market testing. For example:
• the Service may be specialised and only provided by one or two contractors, or it may require specific security clearance. In these cases neither market testing nor benchmarking may be appropriate but some alternative form of value testing such as profit-sharing may be considered,225 or
• there may be no competitive market for the relevant Service in the area, although Authorities should be expected to actively develop a market for the Service where possible. If no competitive market exists or can be developed and effective market testing would thus be impossible, benchmarking (perhaps against suppliers of a similar service operating in a different geographic region) or an alternative form of value testing may be used.
Authorities should consult SIB for guidance where benchmarking is proposed instead of market testing.
15.3.2.4 Whether the Authority determines market testing or benchmarking to be appropriate, it should consider whether it would be beneficial to include provisions in the Contract for an alternative method of value testing. Where market testing is selected as the primary value testing method, provisions could be included to allow the Authority to require a benchmarking process following the initial market test procedure if the market test fails, perhaps due to lack of any bidder other than the incumbent.
15.3.2.5 Similarly, where benchmarking is thought to be the most appropriate value test, it will usually be appropriate to include provisions in the Contract to allow the Authority to require a market test, at its discretion, with or without a prior benchmarking process. Benchmarking on its own is unlikely to produce best value for money results. Authorities should move to market testing following a benchmarking process where adequate benchmark data was not available, a robust benchmark process had not been achieved, or a price adjustment was not agreed. Further, it would be appropriate to move straight to a market test where benchmarking was selected due to a lack of competitive market, and a sufficiently competitive market has developed between Contract signature and the value testing date.
15.3.2.6 Different Services within the same Project may need different treatment (or possibly the same Service could have different treatment at different points in the Project). Authorities need therefore to consider their options carefully both at the outset and at any value testing point.
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225 See for instance Part 15 of the MOD PFI Standard Contract (August 2006) and related guidance, on the MOD website, www.mod.uk where, on these grounds, they provide for a value for money review instead of a benchmark or market test procedure.