The price is reasonable

11  The Department adopted an appropriate governance structure for the project and appointed advisers in good time.

12  To achieve and demonstrate value for money the Department obtained a high degree of transparency and openness from Land Securities Trillium.

13  In the absence of true competition the Department simulated competitive tension by defining a should cost model distinct from the public sector comparator as the primary financial test, and a separate credible commercial alternative to the expansion. In implementing the should cost model, the Department applied our recommendations from other examinations of PFI deals to pool resources with the contractor to obtain relevant common information through jointly commissioned surveys where commercial conflicts of interest were not an issue.

14  The Department used appropriate benchmarks for most elements in the should cost model. The Department applied its estimates of the savings Land Securities Trillium could make through economies of scale, efficiencies and synergies in combining two estates. Where the Department could not benchmark the services it had specified, such as security requirements, it undertook a detailed review of Land Securities Trillium's underlying pricing assumptions to satisfy itself that its approach was reasonable.

15  The negotiations were well conducted. The Department and Land Securities Trillium found it necessary to spend time in detailed discussions to come to a mutually agreed understanding of what was required from the output specification and of the assumptions each had made in their respective financial models. The Department took steps to ensure the integrity of the negotiations was not compromised, and there was no collusion to reach a satisfactory result.

16  After extensive negotiations the should cost price converged with Land Securities Trillium's until the latter's price was 3.5 per cent less than the should cost model being £1,194 million compared to £1,236 million in net present value terms. The total net savings Land Securities Trillium's price provided was estimated at some £220 million in net present value terms, compared to £178 million for the should cost model.

17  It is very likely, as the PFI initiative matures, that other Departments will want to expand existing contracts. There are a number of good practice lessons from the Department's experience of expanding the PRIME contract that should be noted and applied by others, especially if non-competitive negotiations are pursued.