Price Variations - Section 15

50  Section 15 of SoPC has been substantially updated to reflect the importance of market testing services rather than benchmarking services, as set out in HMT's "PFI: Strengthening Long Term Partnerships" document.

51  Section 15 contains principles and approaches for dealing with price variations, including indexation and market testing.  These issues are relevant to Local Authority social care PFI projects and projects in operation or procurement have included benchmarking and market testing for the soft Services.

52  Section 15 of SoPC includes suggested drafting on market testing which have been incorporated into the Model Contract.  The periods at which a Market Test should take place can be a bid back item.

53  Benchmarking is also discussed in Section 15.5 but the drafting is not included in the Model Contract.  There is clear guidance from Treasury that benchmarking should not be used as a substitute for market testing.

54  The Model Contract does not contain provisions for what happens in the event that there is only one compliant tender or no compliant tenders.  There is a footnote against the relevant clause which suggests that the Local Authority and its advisers should consider whether wording should be included dealing with this possibility.

55  It is arguable that the obligation to market test is an opportunity for the Service Provider to increase or decrease the cost of providing the Services but all risks associated with the market test are for the private sector to manage.  Therefore in the event that there are no compliant tenders, the Service Provider is obliged to continue to provide the market tested service on the same conditions and at the same price as in the previous period, i.e. there is no change to the Unitary Charge.

56  The Local Authority will also need to consider what should occur in the event there is only one compliant tender.  In some sectors, the contract provides that the Local Authority will instruct the Service Provider how to proceed.  So for example, the Local Authority could instruct that the compliant tender be accepted or ask that the market test be repeated.

57  SoPC does not offer any guidance on what occurs in these situations.  In some PFI contracts, benchmarking is used where a market test has not resulted in a compliant bid.  However, in the light of the Treasury's directive that benchmarking does not offer good value for money for the public sector, this option should be treated with caution.