Conclusions and recommendations
1. Since 2004 the proportion of deals attracting
only two bidders has more than doubled, with the risk of no competition
if one bidder is weak or drops out.
Lengthy tendering periods and high bid costs are already cited
by bidders as key reasons for greater selectivity, and new procurement
regulations require a greater degree of bid development earlier
in the process. Where only two detailed bids are forthcoming,
project teams should investigate the reasons for the lack of interest,
and departmental Private Finance Units should consider what lessons
can be applied for future PFI deals.
2. The average tendering time for projects
in 2004-2006 was 34 months, compared to 33 months for projects
that closed prior to 2004. The average
cost of advice was £3 million, reflecting the length of the
process, and delays to projects cost the taxpayer at least £67
million. The Treasury should encourage departments to impose
sector specific targets for the completion of deals and require
the completion of post-signing project evaluations by project
teams. A summary of the evaluations should periodically be published
by the Treasury to help spread good practice and learn lessons
for the future, for example, on the need to have the right skills
and experience in the public sector team.
3. One third of public sector teams made changes
to PFI projects after they had selected a single, preferred bidder.
Although new procurement regulations may reduce the scope to make
significant changes after the competitive process has ended, the
practical effect of these regulations has yet to be tested. The
Treasury and Departments should assess the impact of the new procurement
regulations by mid- 2008, including whether they have reduced
the incidence of late changes to deals.
4. Benchmarking and market testing, which
might have been expected to improve prices during the contract
period, have in practice increased prices by up to 14%.
The private sector has been able to negotiate price increases
for the provision of existing services with more than half the
local project teams examined. Such increases put at risk the value
for money case for long term arrangements to provide facilities
services such as catering and cleaning. Such arrangements should
be avoided unless the value for money case can be shown to be
insensitive to the sort of price increases (or equivalent service
reductions) through the contract period that have already occurred
on other projects.
5. Public authorities have found it difficult
to find appropriate data to benchmark PFI service costs, placing
them at a disadvantage in price negotiations.
Incumbent suppliers will be in a strong position if authorities
cannot place them under competitive tension. Partnerships UK (PUK)
should bring to an early conclusion its current work to collect
data on PFI benchmarkings and market testings. The Treasury should
then work with departments to consider whether, taking account
of the PUK data and other departmental cost databases, further
cost data are needed to enable project teams to negotiate robustly
on any future PFI value testing exercises.
6. There is evidence that, faced with price
increases, public authorities had to cut back on services in hospitals,
including portering, to keep the contracts affordable. Where
such cutbacks have been made so far the authorities believed that
they would not compromise the service to the users though cutting
services could, in some situations, impact on users. Where reductions
in services provided under PFI deals are agreed, they should be
notified to the relevant departmental Private Finance Unit. The
Treasury should review the results of user surveys to identify
any evidence that such service reductions have put satisfaction
in doubt.
7. There is a continuing lack of PFI experience
and skills within public procurement teams across the public sector.
One-third of procuring authorities admit that they have insufficient
resources or in-house expertise for part or all of the PFI tendering
process. The Treasury and the Office of Government Commerce should
implement two linked changes to allow all complex procurements
such as PFI projects to be staffed by people with relevant experience
and skills:
¯ the
establishment of a career structure to create and retain a cadre
of appropriately rewarded public sector procurement professionals,
expert in complex procurement such as the PFI;
¯ the
development of a secondment model which would allow interchange
between procurement experts in the public and private sectors.
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