THE
LIMITED
EXTENT
OF
COMPETITION
FOR
THE
PROJECT
The competition for the deal
62. The Department advertised the competition for
the Skye crossing in 1989. This invited initial outline submissions
to quality for selection for a second, fully priced tender competition
limited to three bidders. In response six consortia made initial
outline submissions with ten outline designs.[47]
63. Conscious of the cost for bidders of preparing
proposals, the Department selected three of these consortia, those
they judged had offered the best proposals, to develop fully priced
tender bids in competition. At the closing date of this competition
in November 1990, however, of the three final bids received one
was insufficiently developed while neither of the two other bids
offered tolls lower than the ferry fares.[48]
64. The Department subsequently chose to negotiate
with the one bidder whose toll proposals appeared likely to be
capable of adjustment to meet the objective. This bidder subsequently
faced the need to arrange new financing when it became clear that
they could not obtain external finance on the terms assumed on
their bid.[49]
65. We therefore asked why the Department found themselves
in this unpromising situation. The Department told us[50]
that two of the three final bids proved to be of insufficient
quality. Accordingly, we asked on what grounds they limited the
final competition to three bidders only. The Department told us[51]
that the selection of three final bidders from the six consortia
submitting outline bids was done on aesthetic quality, with no
consideration of price. The Department said also[52]
that, though there was no Government guidance in 1990 concerning
the number of bidders required, they considered it wise to limit
the number to three or four because the price of bidding for PFI
can be several million pounds, much more than for a conventional
project, and that this is what the Government guidance on PFI
now recommends. They said that the selection of three tenderers
not four was the judgement they made at the time.
66. The Department told us[53]
that while the financing terms for the deal varied as a result
of negotiation with the single preferred bidder, they considered
that the main construction element was largely fixed with the
benefit of competitive tension.
The appointment of the Department's advisers
67. The Department had appointed three of their four
main advisers without competition.[54]
We asked the Department why they had done this. The Department
said that they had wanted to proceed as quickly as possible and
that the best way of doing so was to get continuity of consultants.
Their reason for not having a competition for their appointment
of the main engineering advisers was that they wanted the best
advice and they believed that the firm they appointed had the
best record because of their previous relevant work on behalf
of the local authority.[55]
These advisers' fees totalled some £1.3 million.
68. We asked the Department similarly about the appointment
of their main financial advisers. They told us[56]
that there was a limited competition for this appointment—four
firms were approached and the Department selected the firm offering
the lowest bid from two responses—and that this was not
an open process. The final costs of this commission were £155,000
although the Department saw its value as small at the time.
Conclusions
69. Departments must try to secure effective competition
as the basis for any commercial deal, whether for privately financed
projects, public private partnerships or for other types of procurement.
Shortlisting too few bidders or failing to maintain competitive
tension throughout negotiations, as in this case, will increase
the risk of poor value for money. But there is a danger too that
the high cost of tendering for private finance projects may discourage
bidders if too many are shortlisted, and this may also weaken
competition.
70. For this reason Departments must consider carefully
the balance between having too few and having too many bidders,
and how this is likely to affect value for money. Departments
must also try to minimise the cost of tendering in order to maximise
the number of potential final bidders. It will be very important
to keep these aspects in view as experience of projects grows.
71. The Department decided not to apply competition
for the appointment of their advisers. This was contrary to good
practice, unfair and imprudent. Competition would have been no
barrier for getting the best people for the job. Indeed it would
have reinforced the selection of the most suitable advisers. And
the way in which they were appointed makes us all the more concerned
that the Department failed to set budgets for their advisers.
As our predecessors' reports have noted, this is an elementary
element of sound financial control. Departments must ensure that
they carefully assess at the outset their likely costs in managing
private finance deals, and set budgets and manage and monitor
costs accordingly.
47 C&AG's Report paras 1.23-1.25 Back
48
C&AG's Report paras 1.26, 1.31-1.33 Back
49
C&AG's Report para 1.41 Back
50
Q2 Back
51
Q58-60 Back
52
Q61-65 Back
53
Q66 Back
54
C&AG's Report paras 1.12-1.14 Back
55
Q74-75, Q39, Q80 Back
56
Q82, Q136-142 Back
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