COMPETITION IN VALUE TESTING OF OPERATIONAL
DEALS
4. Most PFI contracts have arrangements to test the
value of certain ongoing services through either benchmarking
or market testing, these processes being known collectively as
value testing. The implications of inadequate competition, which
can affect the tendering process, are also relevant to value testing.
Market testing is usually preferable to benchmarking because it
seeks new bids for services from alternative suppliers, rather
than simply comparing costs with similar services provided elsewhere.
There may, however, be situations where benchmarking should be
used, for example where there is insufficient competition to run
an effective market testing exercise.[7]
5. Two of the three market tests examined in the
C&AG's report had resulted in price increases with uncertain
value for money. None of the market tests had been won by a new
external supplier although in one case the service provision had
been taken back in-house. The process was deemed to be competitive
in each case with alternative suppliers putting in bids. The incumbent
supplier is, however, often in a strong position to win the re-competition
of a service contract as a result of its knowledge of the project
and its relationship with the authority.[8]
6. If incumbent suppliers continue to win a high
proportion of market tests, competition in future market tests
could be discouraged, leaving the incumbents in a powerful position.
They would then be likely to remain the supplier of services for
the life of the PFI contracts, which may be as long as 35 years,
with little incentive to improve the services they are providing.
Recent data compiled by the Treasury showed that, where a number
of services were being supplied within a PFI contract, some of
the incumbent suppliers were exposed to competition. The Treasury's
data identified that there had now been 13 market tests (on five
projects, some of which had run separate competitions for a number
of services) and the incumbent supplier on certain services had
been replaced in six of the 13 tests. The Treasury is also working
with Partnerships UK to facilitate a competitive market by publishing
details of forthcoming competitions.[9]
7. If there are situations where project teams cannot
secure strong competition through a market testing exercise then
they will need to use benchmarking to test the value of services
provided by an incumbent supplier. To replicate the competitive
tension that arises in market testing, the public sector needs
to be able to negotiate, based on good benchmarking data, on the
terms offered by other suppliers for similar services. Although
there are some departmental cost databases including non-PFI data,
PFI projects have often had difficulties, however, in finding
comparable data to test whether the prices proposed by the incumbent
supplier are competitive. In two of the four building projects
examined in the C&AG's report which had completed benchmarking,
the outcome had been a price increase, in one case as much as
14%, and the value for money of these price changes had been uncertain.
Better benchmarking data, combined with more effective negotiations,
might have produced improved outcomes in these cases. To assist
situations where benchmarking is used, the Treasury had asked
Partnerships UK to collect data from 55 projects in order to improve
the adequacy of benchmarking information currently available to
departments. Partnerships UK is planning to roll out this data
collection process across the PFI programme.[10]
4 
