All types of project should be considered for a funding competition

2.6  A competition is more likely to be successful, in terms of attracting funding at a competitive price, if the project is well understood by all the parties involved, especially the potential funders.

2.7  Relatively simple projects in mature PFI sectors, such as prisons, roads and accommodation deals, should be easier to finance via a competition than more complex and novel projects. If a project is relatively simple, funders will be able to assess the project's risks and credit worthiness quickly. Funders will have a greater understanding of what the terms and conditions of such contracts are, will know what has previously been considered commercially acceptable and there is a track record showing that these projects are deliverable. The investment risks of these deals will be easier to assess given that they have already gained a high degree of acceptance within the financial markets. Such deals are likely to have very closely followed the standard contract terms recommended by the Office of Government Commerce guidance.

2.8  More complex projects, with which funders have little or no previous experience, may not be so suitable if potential funders need to undertake considerable due diligence and competition cannot be focussed on price or an assessment of key risks, leading to a protracted period of contract re-negotiation. Such projects may include areas that have not previously been subjected to the PFI/PPP process. The risk allocation and terms and conditions of a novel project will not have been tested in the market. It is less likely therefore, that a competition could be run on the basis of a price comparison alone, as was the case with the Treasury building project, as potential funders may have a different interpretation of the risk profile agreed by the department and the contractor. Any differences in the interpretation of risk would need to be priced and taken into account when making a judgement about the value for money of different bids.

2.9  This does not mean that it is not possible to run funding competitions for more complex or novel projects, that intuitively may be harder to understand or have not been the subject of a previous PFI deal. Indeed the potential rewards from running a funding competition may be greater for these projects than for simpler ones. However, there is a greater risk that complex projects will not attract competitive funding and departments will need to ensure that a funding competition run for such projects is well structured.

2.10  In running a funding competition for a more complex project, a department and its advisers will have to work to overcome the potential problems by carefully presenting and explaining the details of the project to the finance market. This is the process that the Treasury, Exchequer Partnership and their advisers undertook to ensure that the finance competition for the Treasury building project was a success. Although the Treasury building project was not overly complex, the idea of obtaining funding via a competition and the previously untested terms and conditions had to be clearly presented to the market.