SUMMARY

1  Before new PFI assets are constructed and services delivered, there is a process by which procuring authorities invite tenders and select a winning bidder for the contract (Figure 1). In order for value for money to be achieved in PFI deals, all stages of the deal have to be managed effectively, including this tendering stage.

2  This study has arisen out of concerns expressed by the Committee of Public Accounts in 2003 that the tendering of PFI projects did not follow good practice and was not handled with sufficient skill on the part of the public sector, incurring high costs and risking value for money. New European Union procurement rules reinforce the need for best practice in the future.

3  We examined the tendering process for all central Government Department PFI projects in England that closed between April 2004 and June 2006, including PFI schools and hospital projects.1 The effectiveness of this process impacts directly on the value for money of PFI deals, though it is outside the scope of this report to provide an evaluation of the value for money of each single deal that closed over the period.2

4  We found that key elements of the tendering process had not improved and in some respects had worsened:

a  There are signs that the private sector is becoming more selective in developing detailed bids3 for PFI projects, in part due to the cumulative impact of lengthy tendering periods and high bid costs. One in three projects that closed between 2004 and 2006 had two detailed bids competing for the business, compared with one in six authorities prior to 2004.

b  Though with differences between sectors, tendering periods overall lasted an average of 34 months (25 months average for PFI schools, 38 months for PFI hospitals and 47 months for other PFI projects) - no better than the average for projects that closed between 2000 and 2003.4 Shorter tendering periods are not desirable if they are achieved at the expense of the overall value for money of the projects. However, we found that many of the reasons for long tendering periods (some of which may relate equally to conventionally procured projects) could have been avoided or mitigated by the public sector, without risking overall value for money. Within the overall tendering period, negotiations to finalise deals with a single preferred bidder have increased, lasting on average over a year and in some cases as long as five years.

c  Material changes (both upwards and downwards) were frequently made by public sector project teams and contractors to the prices of deals during preferred bidder negotiations, when the discipline of competitive tension had been removed. In one-third of projects we examined, there were major scope and specification changes (both upwards and downwards) during the preferred bidder period worth just over 17 per cent of the projects' present values or an average of £4 million a year for each project.

d  Project teams have continued to plan less well than they should for the amount of professional advice needed for a PFI deal. Where budgets were set, spending was on average 75 per cent more than anticipated, or £0.9 million extra per project. The average cost of external advice for all projects was just over £3 million per project or approximately 2.6 per cent of the capital value of the projects. In the health sector, for which data are available over time, the amounts spent on advisers as a proportion of the value of deals has gone down marginally since 1997-2000.

e  Although many project teams told us that they passed on lessons learned to others, systematic ways to ensure that useful lessons are shared were not always exploited. Some issues common to PFI deals were resolved by project teams acting in isolation. However, the issuance of guidance on standard PFI contract terms was one way in which lessons were captured and the Treasury believes that the further development and application of standard terms will yield further benefits in relation to both contractual terms and improved procurement times.

5  Public authorities are now expected to use a new procurement procedure known as Competitive Dialogue.5 Under this procedure, more of a PFI deal has to be agreed with all bidders before a preferred bidder is selected than has been the case in the past, so maintaining competitive tension for longer and reducing the scope to make significant changes to the deal once the competition has been closed, as happened in the past. Some sector-specific guidance has now been issued to procuring authorities, however, the practical effects of Competitive Dialogue are uncertain at this early stage. The enhanced competitive element within the new procedure will in principle bring benefits, but any risk of increased tendering costs for the private sector will need to be managed so that bidder interest does not weaken.

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1  We surveyed 49 projects with a combined capital value of just under £8 billion. We excluded a small number of local authority projects (combined capital value of £750 million) and projects with individual capital values of under £20 million that would now not be considered for PFI under Treasury guidelines.

2  See Appendices 1 and 2 for details of the methodology and projects covered in this study.

3  Detailed bids for this purpose are defined as bids submitted at the Invitation to Negotiate Stage.

4  The overall average for deals that closed 2000-03 was 33 months. In no sector was there significant improvement compared with the period 2000 to 2003. Our figures for tendering times differ slightly from the figures quoted in Strengthening Long-Term Partnerships (HM Treasury, 2006). This is due to a different project selection: further details can be found in Appendix 1.

5   This stemmed from an EU Directive, implemented into UK law from January 2006, which added the option of Competitive Dialogue to the existing range of public procurement procedures.