THE CONTRACT TO DEVELOP AND UPDATE THE
REPLACEMENT NATIONAL INSURANCE RECORDING SYSTEM
VALUE
FOR
MONEY
29. Implicit in the objectives for the competition
was the need for the contract to demonstrate value for money.[28]
In general, there are four key pointers to value for money in
a PFI contract. The first is that the contract should provide
for the required service to be delivered. The second is that the
deal should compare favourably with the cost of alternative means
of providing the same service. The third is that the risks associated
with the contract should rest with those parties best able to
manage them. And the fourth is that the contract should have been
won following a genuinely competitive procurement process.[29]
30. The Agency obtained bids from all three suppliers
that were in accordance with their service requirements. The contract
incorporated those requirements and included critical minimum
service levels which Andersen Consulting were required to meet.[30]
31. The Agency prepared a public sector comparator
to assess the relative cost of the suppliers' bids. This was based
on the original business case for the project adjusted for changes
in scope, the seven year contract period and inflation. Further
adjustments were made to take account of the cost of inputs from
the Agency to the new system which would still be required over
and above the payments to be made under the contract. After these
adjustments the cost of the Andersen Consulting bid was assessed
at £134 million compared with the public sector comparator
of £329 million—some 60 per cent lower.[31]
32. We therefore asked why the public sector comparator
was so much higher than the Andersen Consulting bid. The Agency
told us that it was not directly comparable with the bid as it
had been prepared much earlier in the process and did not take
full account of subsequent events and efficiencies that had taken
place such as outsourcing.[32]
The Agency told us they had subsequently recalculated the figures
taking account of these improvements and arrived at a cost of
£235 million, considerably closer to the two losing bids.
The Agency said that it would never have been practicable for
the in-house option to be close to the Andersen Consulting bid
price given the commercial judgements the company had made.[33]
33. We further asked why the Agency had not prepared
a properly costed public sector comparator taking account of changes
in circumstances and the scope for new technology and whether,
on reflection, they now believe they should have done so. The
Agency told us that they did not judge it worthwhile to commit
the necessary resources to such an exercise when it was clear
that the Andersen Consulting bid was so low. The Agency added
that in the future, depending on the circumstances, they might
well prepare such a comparator but that in this particular case,
because the gap was clearly so large, they remained of the opinion
that the necessary resources to produce it could not be justified.[34]
34. As regards the allocation of risk, the Agency
identified the risks associated with the project soon after Ministers
agreed it should involve private finance. The main risks that
all the suppliers were prepared to take on were:
a. the risk of developing a system and not being
paid anything until it worked;
b. possible claims for compensation in the event
of slippage or service failure;
c. a service credit system which put at risk
some of their revenue if they did not meet certain defined performance
targets; and
d. the risk that when the provision of NIRS2
was re-tendered, the existing supplier would not receive a transfer
payment if a new supplier won the competition and chose not to
use the incumbent supplier's system.[35]
35. We asked the Agency whether they accepted that,
although they had transferred the financial risk of non-delivery,
they retained the business risk. The Agency accepted that this
was a risk they would always have to carry. The existing system
was not capable of supporting the new pensions legislation. The
tight timetable would have been the same irrespective of whether
an in-house or PFI solution had been adopted.[36]
36. All three suppliers were kept in the competition
until a very late stage thus ensuring the competitive pressure
was maintained. The contractor offering the lowest price for the
services required was selected and final terms were agreed within
a month of the receipt of best and final offers from all three
suppliers.[37]
37. Andersen Consulting had been involved in the
development of the original business case for the project between 1992
and 1994. We therefore asked the Agency whether Andersen
Consulting had received a competitive advantage from this early
involvement which had enabled them to offer a much reduced price
in the hope of benefiting from additional work later on. The Agency
told us that they had made sure that all of the bidders were starting
from the same point in terms of knowing what was required and
the activities of the Agency. They said that the other bidders
had a similar background and knowledge of the Agency.[38]
Conclusions
38. Sound decisions as to whether a PFI solution
offers value for money will normally require a systematic comparison
to be made with a properly costed alternative option or options.
In the case of NIRS2, the original public sector comparator did
not take account of efficiency improvements arising from the outsourcing
of certain operations and did not therefore provide a realistic
comparison. Where, as in this case, there is a very large difference
between the comparator and the bids received, there may be grounds
for checking both the reasonableness of the costings in the comparator
and that the bidders have properly understood the required service
specifications. In all cases, however, we expect departments to
devote such resources to working up a comparator as are appropriate
in the circumstances. The comparator should be robust enough to
provide a sound guide to the exercise of judgement, but it does
not necessarily have to be calculated to the finest accuracy.
39. It is extremely important to preserve the integrity
of the procurement process: if other bidders perceive that one
competitor has an unfair advantage they are unlikely to bid, and
the public sector is unlikely to get good value from the contract.
28 C&AG's Report paragraph 1.8 Back
29
C&AG's Report paragraph 2.2 Back
30
C&AG's Report paragraph 2.5 Back
31
C&AG's Report paragraphs 2.6-2.9, Figure 8 Back
32
Q16-29 Back
33
Evidence, Appendix 2, pp 23-26 Back
34
Q113 Back
35
C&AG's Report paragraphs 2.11, 2.13 Back
36
Q48-49 Back
37
C&AG's Report paragraph 2.17 Back
38
Q59 Back
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