Select Committee on Public Accounts Forty-Second Report


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.


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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