Under the Private Finance Initiative (PFI) there are now 800 contracts with private sector suppliers for services worth in total £155 billion up to 2032.1 To achieve value for money, all stages of a project have to be managed effectively, including the tendering process, when procuring authorities invite tenders and select a winning bid for the contract. In 2003 we highlighted a number of issues regarding the PFI tendering process and concluded that the taxpayer was not always getting the best deal from PFI contracts because good procurement practice was not being followed.2
Four years later these concerns remain and the Treasury has done little to apply what it has learned from the large number of PFI deals that have now been signed. There has been no improvement in tendering times, significant risks to value for money continue to be taken when public authorities make late changes to deals, and there is a continuing lack of skills and experience in public sector PFI teams. As a result, there are signs that market interest is weakening, with fewer serious bids for recent deals.
The cost of ongoing services provided under the PFI is a significant element in overall costs and in the value for money of deals which may run for up to 35 years. Most contracts include provisions for testing the value of services such as catering or cleaning, typically every five to seven years, by comparing information about the current service provider's provision with comparable sources (benchmarking) or inviting other suppliers to compete with the incumbent in an open competition (market testing).
The early experiences of these value tests show that PFI contractors are using these processes to secure price increases and that some authorities are cutting services to pay for them. There is also a lack of comparable data to check whether prices proposed by incumbent suppliers are competitive. So business cases for long-term PFI contracts, where services could be otherwise procured conventionally through short term contracts, need to be tested against a robust range of price scenarios, to show that the value for money case is insensitive to possible price increases.
On the basis of two reports by the Comptroller and Auditor General,3 we examined whether the PFI tendering issues we highlighted in 2003 are being addressed and the early experiences of the small number of PFI projects that had carried out value testing up to summer 2006.
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1 Committee of Public Accounts, Twenty-fifth Report of Session 2006-07, Update on PFI debt refinancing and the PFI equity market, HC 158, para 21
2 Committee of Public Accounts, Twenty-eighth Report of Session 2002-03, Delivering better value for money from the Private Finance Initiative, HC 764
3 C&AG's Reports, (1) Improving the PFI tendering process, HC (Session 2006-07) 149 and (2) Benchmarking and market testing the ongoing services component of PFI projects, HC (Session 2006-07) 453