44. The biggest and most challenging aspect of preferred negotiations is the sea-change in relative bargaining position that down-selection to a single bidder heralds. Where once the IPT had two or three bidders against whom competitive tension could be leveraged it now has to face up to the fact that the preferred bidder is the "only show in town". Loss of competitive tension is not a risk that can be avoided - it will always be present in a situation where there is a sole bidder (hence the emphasis in the earlier guidance on the eight pre-requisites for selection of a preferred bidder). IPTs must focus on how they and their advisers will manage that risk and successfully conclude their projects. Projects which have not:
• comprehensively identified and negotiated key issues prior to down-selection; and/or
• optimised the Authority's position by using competitive tension;
are likely to have either:
• an extended period of preferred bidder negotiations; and/ or
• risk signing a deal on sub-optimal terms; or
• both;
and may moreover open themselves to challenge from disgruntled bidders who were not taken forward on the basis that the deal struck with the preferred bidder is materially different from that evaluated.
45. So what should have happened prior to appointment of the preferred bidder to manage the risk of losing competitive tension? Ideally, the "core of the deal" should have been settled in detail with the preferred bidder and approved as "bankable" by its lenders prior to down-selection and the Authority should have confidence that the price which it has been quoted for the services is stable and will not be subject to further material change. The preferred bidder and the IPT should be presenting a united front to the lenders in terms of what their project is about and, critically, the risk allocation that has been achieved. Ideally, the preferred bidder should be acting as a true "sponsor" of the project with regard to lenders - building on the commonality of interests and understanding of the IPT's position which it has developed over the preceding months. This is not to say that the IPT can, in effect, delegate the protection of the Authority's interests to the preferred bidder - that would be inadvisable. Rather, the ideal proposition should be that through the course of negotiations (while there is still competitive tension) the IPT and its preferred bidder should be able to develop a common front on all critical risk issues that they are comfortable in "selling" to the lenders. In effect, the Authority and its preferred bidder should have reached "commercial close" or be very near to so doing and have obtained agreement in principle from lenders to this position. For a more detailed explanation of what the key considerations are IPTs should read the DPA PPFI's Guidance on Selection of a Preferred bidder and in particular the eight prerequisites for selection of a preferred bidder set out below:
• proposals that meet the output specification;
• value for money;
• acceptance of key commercial provisions;
• acceptance of risk transfer;
• no scope to seek price revisions;
• confirmed access to finance;
• affordability;
• cohesive team.
46. In reality, what often happens is that a preferred bidder (having successfully caveated its position on key issues without an appropriate level of challenge from the Authority during its evaluation of bids) uses the hurdle of lender due diligence to further erode and undermine the risk transfer that has been "agreed in principle" on the basis that it is "unbankable" once the "devil in the detail" becomes apparent. In circumstances where the Authority's requirements have not been adequately expressed in its output specification (and are either ambivalent and/or subject to change) the preferred bidder will often seek to add to its price - and of course without the discipline of competitive tension the IPT cannot be certain whether a given price adjustment represents value for money. In such circumstances there is little or no prospect of the IPT and its preferred bidder presenting a united front (either before or after down selection) to the lenders and the process will become protracted and complex as each party struggles to assert its view on risk transfer and its impact on price. The opportunity to engage in uncompetitive re-pricing is something which many bidders are keen to exploit at this stage of the process. Equally, where the Authority's requirement is unclear or changes the preferred bidder is often forced to revisit its pricing as the intended risk allocation becomes clearer.
47. Uncompetitive pricing generally arises due to two main reasons:
• price validity lapses; and
• requirement change.
Strategies to deal with the former are basically centred on the Authority showing foresight in terms of the proposed preferred bidder's bid validity and planning in advance how any change (to take account of inflation or interest rates) will be factored into the revised price. The latter is really a question of ensuring that as far as possible the Authority has settled its requirement during the competitive stage and that, in consequence, there will be no material changes involving re-pricing during the preferred bidder period. Unfortunately it is not always possible to close down the requirement and IPTs are often confronted by requests from their customers for late additions to the specification.
48. So how can an IPT manage uncompetitive re-pricing during the preferred bidder stage? We have listed below a number of techniques that should be used: