2.7 In competing a change, an SPV may have different incentives to the public sector authority requesting the change. An SPV will want to ensure that a change will not jeopardise its ability to meet the requirements of the contract or to service its debt. As a result, it will tend to give greater priority to the quality of contractor than to keeping the cost of making a change down, typically restricting any competition to sub-contractors which it has vetted. In addition, where SPVs charge a fee as a percentage of the cost of the change, there is again an incentive to not necessarily minimise costs. The public sector can use external advisers to check costings, but this is an incomplete substitute for a fully competitive process.
2.8 The most recent version of the standard form guidance for PFI contracts (SOPC4) recognises the need for public sector authorities to have rights under the contract so that they can monitor competitive tendering processes undertaken by SPVs and intervene if proposed contractors are unsuitable. The new guidance also states, for the first time, that quotes should be obtained from at least three suppliers. This will benefit new PFI projects, however, projects that are already operational tend not to have the same safeguards in place.
2.9 The example of Avon and Somerset magistrates' courts highlights this risk of higher costs under PFI, even where a competitive process has taken place, in the absence of the new SOPC4 safeguards (Case example 1). No two jobs will be exactly alike although the courts project team thought that the two jobs set out below were reasonably comparable in terms of labour, materials, and skill level required. In the PFI court, four firms were invited by the SPV to bid for the work and two tenders were received. Following a review of costs conducted by the Authority and the SPV, the price was reduced by over 30 per cent in negotiations. There were also significantly higher fees incurred for the change made to the PFI court than the conventionally-procured court (see paragraphs 2.20 - 2.24). This example is not an isolated one. Overall, 59 per cent of contract managers responding to our survey considered changes in PFI to be more expensive than equivalent changes in conventionally procured projects.6
CASE EXAMPLE 1 | ||
A comparison of room conversions made in PFI and non-PFI courts in Avon & Somerset, both with base costs of approximately £100,000 | ||
court | Worle | Bridgwater |
Procurement method | Conventional | |
Year change completed | 2007 | 2007 |
Description of work | Two rooms merged to create a dual function Judges' hearing room and court. Conversion of a store-cupboard to a toilet. Staff room split into two. Furniture and IT/data requirements. | Conversion of areas to provide two new custody suites, new prison staff area and toilets, and interview rooms. Corresponding mechanical and electrical work. |
Nature of price testing | Competitive process run by SPV. Four tenders invited and two tenders received. Value engineering exercise to negotiate costs down. | Competitive process run by a company appointed by HM Courts, which also provided a pre-tender estimate. Three tenders received. |
Initial base cost quoted by winning bidder | £140,000 + VAT | £107,000 + VAT |
Agreed base cost | £96,000 + VAT | £100,560 + VAT |
Fees | 15% for the FM provider + 15% for the SPV - total of £31,000 | 10.5% - total of £10,560 |
Additional costs | Fee for initial cost report: £17,000 | Contingency sum: £6,000 |
| Lifecycle costs: £56,000 (reduced from £180,000 following negotiation) Miscellaneous other costs: £18,000 | There may be further costs over time if items need replacing or repairing. The whole-life cost of this change is thus unknown. |
Source: HM Court Service, South West region |
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