3.21 Figure 12 shows the direct cost of tendering delays to the public sector, based on figures provided to us by public sector procurement teams that closed PFI projects between April 2004 and May 2006. Delays in completing negotiations will delay the benefits and any expected savings for public services envisaged in a PFI deal. There were other costs as well, including the additional cost of advisers and the need sometimes to add the cost of construction inflation to the original price of the bid due to the expiry of a previously agreed bid validity period. Case Example 3 illustrates how these costs impacted on a large hospital deal.
3.22 It should be noted that the figures in Figure 12 are probably an under-estimate of the true cost to the public sector, although they are still small relative to the total value of the deals we examined (£7.75 billion). The majority of public sector procurement teams which stated that costs had occurred as a result of lengthy negotiations were unable to quantify them. The figures in the table are thus the total of those provided. The table does not include costs such as internal staffing costs and opportunity cost. On the other hand, the figure for overspends on adviser budgets may not be wholly attributable to delays in tendering, also reflecting in part unrealistic budgeting.
12 | The cost of tendering delays: figures provided by Authorities for PFI deals in our sample which closed between 2004 and 2006 | ||
Type of cost | Percentage of projects affected (%) | Cost to the public sector (£ million) | |
Overspends on adviser budgets | 59 | 23 | |
Expiry of the bid validity period led to a re-costing of the project by the preferred bidder | 50 | 20 | |
Expected benefits from the PFI project delayed or not realised | 36 | 7 | |
Expected savings not achieved | 15 | 6 | |
Contracts for existing services extended until PFI deal becomes operational | 33 | 1 | |
unquantified costs: e.g. internal fatigue of the project team, impact on current service provision, opportunity cost and the unavailability of internal staff for other work | 15 | - | |
Other unspecified impacts | 2 | 10 | |
Overall total | - | 67 | |
Source: National Audit Office census 2006 |
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CASE EXAMPLE 3 |
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University Hospital Birmingham - the complexities of a large hospital deal and the impact of delays to preferred bidder negotiations university Hospital Birmingham was the second largest PFI hospital deal to have reached financial close, with a capital value of over £550 million. The scheme incorporated a new 1200 bed hospital, a new Royal Centre for defence medicine, a new Clinical Sciences Centre, a new mental healthcare facility, improved car parking and cycle routes, better bus and rail access and an improved road layout. Financial close was reached in June 2006 following a tendering period of just over four years. The main delays in the tendering process came during preferred bidder negotiations which took 29 months - well over half the total tendering period. The delays, in part, reflected the complexities of a deal of this size. For instance: ■ The deal involved two separate NHS Trusts as well as the university of Birmingham and the moD. ■ Birmingham was the first Foundation Trust to agree a PFI deal. One of the parties raised issues about whether the relevant legislation allowed Foundation Trusts to do the deal, and this legal point took five months to resolve. ■ A site that had been earmarked for a mental health facility fell through due to issues of ownership. An alternative site had to be found with new designs. ■ The Advanced Works Agreement took from February to October 2005 to complete, which delayed commencement of work on the main Project Agreement. ■ In addition to normal approvals procedures, a Treasury review examined the affordability of the scheme (as represented by the percentage of unitary payment to the Trusts' turnover) two and a half months before financial close. ■ To achieve an affordable scheme considerable changes were made, leaving many issues to be resolved during the preferred bidder period. These included planning issues, affordability, design, the allocation of different types of contamination risk, energy and legal points such as covenants and clarifying all aspects of the agreement. Some of these issues led to changes being made to the project specifications during preferred bidder negotiations. In total, these changes (whether additions or reductions to the original specifications) were worth the equivalent of just under £5 million per year for the lifetime of the contract, or eight per cent of the annual unitary charge as it stood at the point of selection of preferred bidder. Costs of delay included additional spending of £6.54 million (one per cent of the deal's capital value) on advisers which was nearly double what was originally anticipated. In the outcome these costs were offset by favourable interest rate movements over the period and a decision to extend the length of the contract, which helped to ensure that the deal remained affordable to the Trusts concerned. | |