2.6 The Department were exempted from advertising the competition in the Official Journal of the European Communities and from following European Union procurement rules as the project contained elements concerning national security6. As the project started off as a conventional public funded procurement, the Department adopted their normal practice and followed a procedure similar to the European Union restricted procedure, which limited the scope for bidder negotiation. They planned to shortlist two firms to supply a Best and Final Offer, then select a preferred bidder and only after that enter into detailed negotiations. The Department chose this strategy as they considered the overall competition would drive the value for money process, without the need for detailed negotiations which, with up to six bidders, in their view would have required too many resources.
2.7 The Department's chosen procedure meant that there was limited opportunity for detailed discussions with the bidders when the Department were considering the bids. This contributed to the Department requesting a total of three Best and Final Offers from BT and Racal, where only one is preferable in a competition. The second was necessary because bidders had not fully accepted or complied with some of the Department's requirements. The third was requested because the Department believed the bidders could improve their prices, which they did. Bidders told us, however, that the chosen procedure added to the time and costs of bidding. The Department do not agree with this view as it assumes that a quicker procurement would have resulted in this case from the alternative of the European Union negotiated procedure.
2.8 We welcome the Department's efforts to improve value for money by maintaining competitive pressure on bidders. Increasing bidding time and costs, however, add to the costs to be recovered by the winning bidder through the contract prices. The Department may have been able to maintain competition and secure price reductions in a shorter time and at a lower cost to bidders by allowing full negotiations and discussions with bidders, as provided for under the European Union negotiated procedure. This procedure allows earlier detailed negotiation with the bidders and greater scope for discussions of innovations, so is better suited to complex privately financed procurement than the procedure adopted by the Department for this procurement. The Department have noted that the European Union Public Procurement regulations state that this procedure is to be used "exceptionally where the nature of the services to be provided; or the risks pertaining thereto, are such as not to permit prior overall pricing"7. However, the Department acknowledge the utility of the negotiated procedure, and recommend it in their current guidance on Private Finance Initiative procurement. While the Department's project team have told us that they were not advised to follow the European Union's negotiated procedure, there was an awareness within the Department and in the private finance market in mid 1995 when the project was being tendered that the negotiated procedure was appropriate for privately financed deals. This procedure allows earlier detailed negotiations with the bidders and greater scope for discussions of innovations, so is better suited to privately financed procurement than the procedure used by the Department for this project.
2.9 The clarification of information supplied to bidders and the Department's requirements for UNITER are examples of matters which could have been dealt with more effectively through earlier discussions with bidders and full negotiations. We do not find the Department's concern that this would have required too many resources convincing. We consider that there could have been greater flexibility and time savings from full negotiations which would have freed up resources at an earlier stage. The Department believe, however, that the approach they followed was the most appropriate and timely for this project. They acknowledge, however, that their procurement guidelines issued in November 1995, when this competition was well underway, confirmed the European Union negotiated procedure was likely to be the preferred route for private finance contracts.
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6 Article 223 of the Treaty of Rome, replaced by Article 296 of the European Union Combined Treaties, contains an exclusion from competition rules for members' defence bodies.
7 European Union Public Services Contracts Regulations 1993, Regulation 10(2)(b).