2.43 During the phase of negotiating with a preferred bidder during a Private Finance procurement, it is important that departments seek to maintain pressure on the bidder to minimise cost increases, because that bidder no longer faces the incentive of direct competition. Generally, the longer the negotiation phase with a single preferred bidder, the harder it becomes for a department to maintain competitive pressure. To protect their position in this case, the Contributions Agency chose to continue negotiations until fully satisfied with the terms of the deal. For example, they continued negotiating until fully satisfied with transfer of the risk of structural defects at Tyneview Park and Durham House, and they decided not to reach final commercial agreement in March 1997 while certain elements of expenditure in NEP's bid were expressed as estimates rather than binding figures.
2.44 When the Department appointed NEP as preferred bidder in June 1996, the Agency recognised that preferred suppliers benefit from a strengthened negotiating position. The Agency expected to sign the Private Finance deal in late 1996. They sought to maintain negotiating pressure on NEP by:
a) using their own analysis and the input of the appointed experts to challenge NEP's proposals where they were unacceptable; and
b) by retaining the second placed bidder, Tyne Partnership Limited, as a reserve supplier until January 1997. The retention of a reserve supplier is a technique which has not been common practice in Private Finance procurements but which the Agency developed as part of this project.
2.45 The Agency decided to stand Tyne Partnership down in January 1997, after receiving a letter confirming NEP's commitment to the deal in December 1996. At that time, they expected to sign the deal by March 1997. After standing Tyne Partnership down, the Contributions Agency could not invoke the threat of replacement to increase pressure on NEP.
2.46 Over the period of negotiation, both the costs and benefits of the deal increased, with the estimated net present cost of the deal increasing from £219.3 million to £226.1 million. This increase comprised additional costs for extra services and earlier occupation of the estate, which meant that important risks were transferred to NEP earlier than originally expected and that the Department enjoyed earlier the benefit of moving into better accommodation. The increased cost as a result of negotiations between the Contributions Agency and NEP amounted to £36.2 million (15 per cent), of which £14.8 million was as a result of earlier transfer and occupation of buildings.
2.47 The overall increase was counteracted by the concurrently favourable impact of reductions in market interest rates, which reduced costsby£29.4 million (13 per cent). Figure 11 summarises these changes.
2.48 Not all changes in the deal over the period of the negotiations with NEP were quantified. The Contributions Agency adopted a variety of approaches to negotiation: including a trading approach, a persuading approach and the standard approach where by a fair price is negotiated for a new requirement. In the trading approach, they only agreed to concede an issue to NEP in return for concessions by the consortium. Because the Contributions Agency did not place a monetary value on most of the concessions it made to or won from NEP, it is unclear how these affected the value for money of the deal.