Costs to the shortlisted bidders were high

1.29  The bidding costs to the private sector are important because unacceptably high costs will tend to deter participation in future competitions. The five bidders who responded to our survey of their views on the PPP process considered that the Department and their advisers had managed the process well in terms of moderating the costs to those bidders who did not make it through to the shortlisted stage. In contrast, the three shortlisted bidders incurred some £25 million of costs in total, and the two unsuccessful companies felt that the process did not keep their costs down to a reasonable level. The Airline Group told us that by using success fees, and deferring costlier advice until the final stages, their costs would have been as low as £3 million had they lost.

1.30  The full and efficient provision of information about the business to bidders is vital to the success of any PPP or privatisation process, but the scale of the task can be huge and can take vendors by surprise. It is good practice for departments and the managers of the businesses being sold to scope and plan the provision of data as major projects in their own right, drawing on the expertise of their advisers, public sector experience on other trade sales and timely statements of information needs by bidders.

1.31  Shortlisted bidders reported difficulties with the provision of data from NATS. They were disappointed that the data room, on which they depended to inform their bids, initially held much less data than they had requested, and the other items were provided very late in the bidding process. NATS agreed that there had been problems as a result of an enormous quantity of information in the data room. The exact reasons for this remain a matter of debate between NATS and their advisers on one hand, and the Department and their advisers on the other. But we have concluded that the key factor was a difference in approach between the two teams towards the provision of data, specifically:

■  the Department and their advisers favoured determining the information that should be provided for bidders through a relatively low minimum financial threshold, eventually set at £150,000, but offset by selective judgements as to what should be provided above that figure;

■  NATS and their advisers preferred a relatively higher financial threshold, but being more comprehensive in the information provided above the threshold.

We consider that the information overload reported to us by bidders reflects in part the process suffering from the worst of both these worlds. Another factor was the commercial confidentiality of some of the data requested by bidders, which led NATS to apply additional procedures to preserve the security of the information.

1.32  Nimbus, the second placed bidder, told us that they had incurred costs of £10 million in bidding for the PPP, and would not wish to participate again in a competition for government business that exposed them to the risk of such high nugatory costs. We found that the main reasons why Nimbus' costs were so high were:

■  The extent to which they had responded to government's requirement to provide a fully financed bid, with full approval from their supporting banks' credit committees. Such approval is expensive to obtain, and it is evident that other bids did not obtain such firm financial support as quickly in the process as did Nimbus.

■  The inclusion in their bid of Serco's own air traffic control business, which the Department's sales team had to value and subject to a due diligence review.

1.33  The evaluation of Serco's air traffic control business to be merged with NATS was important to the evaluation of bids as a whole. Had the Department accepted Nimbus' valuation, this would have made their bid worth more than the Airline Group's final offer. In the event the sale team derived a much lower valuation than Nimbus'. Nimbus are currently in dispute with the Department over £2.5 million of advisory costs which the Department incurred evaluating the business and had agreed in principle with Nimbus would be recharged to the company. Key factors contributing to this dispute are that:

■  the Department's team did more work than Nimbus had expected, in particular by examining individual contracts rather than forming a view on the business as a whole; and

■ the work was done in a very short but intense period in early 2001, and it was not clear to Serco that the costs were going to be so high until it was too late to act.