14. PFI contracts for built assets are typically for a minimum of 25 or 30 years. The benefit of having a prison or hospital delivered on time and to the cost expected by the public sector will count for little if PFI contractors exploit their contractual position by overcharging for additional services that departments may require during the contract period. In 22% of the central government building projects examined by the NAO the price to the department had increased. These price increases mainly related to further work which had not been part of the original specification, on additional or improved facilities or changes to the function of a building. Since around one in five of the projects examined had already been expanded within a few years of contract letting, additional works are likely to be a significant feature of PFI contracts in the long term. But as the department is tied to its PFI contractor for a long period this further work gives PFI contractors the potential to earn a lot of additional money.16
15. If additional work is given to an incumbent supplier there is a risk that value for money will not be as good as that achieved through competition. The OGC acknowledged that in private sector construction there is a lower rate of post-contract changes because standard building models are often used and specifications are less likely to be changed after contract letting. Departments were contractually obliged to ask the PFI project company to undertake additional works after contract letting, they were expected to obtain the right to ask the PFI project company to conduct a competitive tender to determine which construction sub-contractor should undertake the work. The PFI project company therefore had control over the running of the competition, although a department could debate with the company which companies should be invited to bid for the work. Under conventional procurement, on the other hand, departments would be free to run their own competition for any additional works. A department might be able to negotiate a better price where it had direct control over the competition than in a competition run by a PFI project company.17
16. Where additional work is given to a PFI project company it is essential that a department satisfies itself that the pricing of the additional work is value for money. Yet in only three of the eight projects examined by the NAO where there had been a construction related price increase had the departments benchmarked the price increase. The OGC's July 2002 guidance had strengthened the requirement for departments to benchmark the price of any additional works. If a department was not satisfied with the proposed price for additional work it could require the PFI project company to re-tender the work or have the price determined by an independent third party. Departments would be able to obtain benchmarking data from third parties or from the departments' records of previous transactions.18
17. Another risk with a long term PFI contract is that, rather than needing additional work, a department may find it no longer needs the built asset at all. The OGC accepted that in this situation it would be more costly for a department to extricate itself from a PFI contract than if the asset had been procured conventionally. A further risk from the long term nature of a PFI contract is that the PFI project company may develop an overriding advantage which may deter other companies from bidding when the contract comes to an end. The National Lottery has illustrated the strong position which an incumbent supplier can establish. Alternatively, a company might seek to purchase an interest in all the PFI contracts in a particular sector in order to become a monopoly supplier to the sector. The OGC acknowledged these points but said that at the end of a PFI contract the built asset would come back into public ownership, giving a department the choice of managing the asset itself or recompeting the service. A department would have similar rights if the PFI project company became bankrupt. Departments also generally had the right to restrict the transfer of shares in a PFI project company to any party the department deemed unsuitable. The OGC said that aspects of the PFI service such as catering and cleaning would be re-competed every five or seven years. Such break clauses might help to avoid incumbent PFI contractors building up an overriding advantage.19
_____________________________________________________________________________________________________
16 C&AG's Report, paras 5-6 and Figure 1, p3; Qq 53, 126-128, 137
17 Qq 83-87, 118-120, 163-164; Ev 19-20
18 C&AG's Report, para 2.8; Qq 2-3, 125, 138-140; Ev 20-21
19 Qq 118-132, 143-145; Ev 21-22