12. Competition is a fundamental requirement for getting good value from PFI deals. A procuring department needs to survey the market to establish how many companies would be interested in the project and to assess whether its proposals are likely to be attractive to potential bidders. If too few bidders are interested there may be problems with the design of the project and the department should think again. Competitive tension amongst a number of bidders needs to be maintained for as long as possible. A single preferred bidder should not be chosen prematurely or before outstanding issues have been resolved. When it is no longer possible to maintain competitive tension and exclusive negotiations with a single bidder begin, departments should aim to manage these negotiations as effectively as possible. Changes to the project at this late stage are likely to increase its cost.
13. Figure 4 shows some examples of cases where the procurement process has not been fully competitive and value for money is unlikely to have been achieved. In some cases departments have ended up with a single bidder but have still pressed on despite evidence that there were problems with the design of their projects. In other cases there have been protracted negotiations at the preferred bidder stage and the cost of the deal has crept up.
Figure 4: Examples of inadequate competition
PFI deal | Committee's findings |
Immigration and Nationality Directorate (7th Report, Session 1999-2000) | Key figures, on which future increases in productivity would be measured and payments to the contractor calculated, had not been finally agreed until more than a year after the contract was signed. Such important issues need to be finalised before a contractor is selected and the benefits of competition fall away. |
Dartford and Gravesham Hospital (12th Report, Session 1999-2000) | The NHS Trust selected two firms to submit final bids but one of the firms did not submit a bid. The Trust therefore ended up with only one final bidder on this major pathfinder project for the use of the PFI in the NHS. The bidder's final bid was 33% higher in real terms than its indicative bid. The Trust did not undertake a detailed analysis of the reasons for the increase in the final bid, especially given the absence of other bids. Such action might have helped the Trust to secure a greater price reduction in the subsequent negotiations. |
In this deal the Department of Social Security appointed a preferred bidder whilst important issues remained unresolved. Exclusive negotiations with the preferred bidder continued for 18 months. | |
There had been a lack of market interest in the deal when it was put out to the market and only one bid had actually been received. When withdrawing from the competition for this project, one company had expressed concern over the practicality of the proposals for joint working between the public and private sectors in certain areas. The Royal Armouries were not given access to the contractor's financial records and there were disagreements between the two parties over issues which were of fundamental importance to the museum's future. | |
The preferred bidder agreed to hold its price for seven months but it took the Trust eleven months to close the deal. The price increased after the commitment period had expired so the price commitment had only limited effect. The principle of securing a price commitment to deter "deal creep" is good, but a department using this approach needs to be sure that it can close the deal whilst the commitment still holds. |