Competitive tendering for new deals
1. If value for money is to be achieved and maintained, it is critical to have a functioning competitive market, yet the proportion of projects attracting only two viable bids has increased in recent years. Whereas 15% of projects that reached financial close in 2003 or earlier had attracted only two bids, this figure had more than doubled to 33% for those projects that closed between 2004 and 2006 (Figure 1).4
Figure 1: The proportion of projects attracting only two viable bids has increased in recent years
Source: National Audit Office
2. Lengthy tendering periods and high bid costs are discouraging bidders and there is a risk that low market interest may become a significant problem for future PFI deals. This risk could increase following the introduction in early 2006 of a new EU procurement procedure, known as Competitive Dialogue, which requires a greater level of agreement on contractual terms prior to the appointment of a preferred bidder and will increase overall tendering costs for losing bidders. The Competitive Dialogue procedure may also make it more common for procuring authorities to choose to go down to two bidders at an earlier stage, in order to reduce costs for both themselves and the private sector. While the presence of two bids still allows for competitive tension, there is a risk that it could be lost if one of the bidders drops out.5
3. The Treasury is monitoring the situation closely but, despite there being twice as many projects since 2004 attracting only two bidders, it did not believe there was a worrying shortfall of competition on bids. It saw no evidence to suggest that the falling number of viable bids was a result of collusion between private sector companies to agree on which projects to bid for, thereby reducing their outlay on unsuccessful bids.6
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4 C&AG's Report (1), paras 2.1, 2.2
5 C&AG's Report (1), paras 2.5, 2.7; Qq 85-86