CUSTOMER:

Bridgend Prison, UK

SERVICE PROVIDER:

Securior, Siefert, WS Atkins

TRANSACTION STRUCTURE:

Design, Build, Operate, and Finance

YEAR:

1996                                           DURATION: 25 years

ILLUSTRATION: This case study illustrates die cost associated with pursuing a one-sided risk allocation. Aiming for optimization, rather than maximization, of risk transfer will lead to increased competition and a more expeditious procurement process. In this case, the British government attempted to transfer risks which were out of the contractors' control. As a result, no conforming bids were received, and the UK government was forced to rebid the project based on a revised risk allocation.

BACKGROUND: In November 1993, the Prison Service invited expressions of interest in the design, construction, management, and financing of a prison in Bridgend, South Wales. One year later, of the ten consortia that expressed interest, six were invited to submit tenders. This was one of the first projects to be procured under the UK's Private Finance Initiative, which is a program seeking to access the efficiencies available in the private sector by paying for services delivered, rather than financing capital assets through traditional government procurement processes.

TERMS OF CONTRACT/RISK ALLOCATION: The Prison Service viewed the procurement as buying custodial services from the consortium for a period of twenty-five years. The capital investments required were considered to be ancillary to the main purpose of the contract. As supplier of the custodial service, the consortium assumed the risk of making a minimum of 800 prisoner spaces available on a continuous basis throughout the life of the agreement. As such, the consortium assumed design, construction, availability, and operating risks. In short, the consortium was to be paid only for the supply of prisoner spaces to the extent that they were available on any day during the period of the agreement "Availability" involved both the prison itself being in accordance with the specifications and the operating and maintenance activities fell within certain predefined parameters. The government, in turn, committed to a stream of payments for services over a twenty-five year period.

ISSUES CONFRONTED: The key issue faced in the procurement process related to the initial transfer of risk to the private sector. In its first invitation for bids, the government tried to transfer demand risk, That is, it intended to pay the consortium for the number of prisoners actually occupying the prison in any given day. Since the government was a monopoly supplier (through sentencing policy), it could determine the number of prisoners who occupy the prison at any given time, and therefore was attempting to transfer a risk over which it had ultimate control. As a result. no conforming bids were received and the project had to be recompeted.

OUTCOME/CURRENT STATUS: Due to the problems experienced in the first tender, the government revised the risk allocation and rebid die contract In June 1995, a winning consortium was selected and the contract closed in early 1996.