2 Competition for larger changes
to projects
10. Over the course of 25 to 30 years of operation,
it is inevitable that changes will be needed to the services and
assets provided under PFI deals. In 2003, our predecessors recommended
that Departments should insist on competitions for the provision
of additional work after a PFI deal becomes operational.[10]
11. In 2006, major changes costing £100,000
or more accounted for 90% of the overall cost of changes to operational
PFI projects. 27% of these larger changes might have been suitable
for competitive tendering but were let without competition (Figure
2). The value of these non-competed changes was £84 million.
[11]
Figure 2: High-value changes were not always competitively tendered
Source: C&AG's Report, Figure 7
12. The Treasury has a strong presumption in
favour of competition. There can, however, be sound reasons why
procuring authorities decide not to put changes to PFI projects
out to competitive tender. For example, of the three largest changes
that took place in 2006, two were prisons requiring additional
prisoner accommodation. As the prisons had to remain in use while
building work was underway, the Prison Service judged that the
existing contractor was better placed than an outsider to manage
the risks involved. The prices offered by the existing contactor
had been benchmarked and the Prison Service decided that awarding
the work to the incumbent contractor was the right thing to do
on operational and price grounds.[12]
13. The companies involved in a PFI deal establish
a separate company, known as a Special Purpose Vehicle (SPV) to
manage the project, including any competitive tendering for new
work. Operational issues have to be considered carefully, but
they are not necessarily a block to competition. For example,
East Riding of Yorkshire Schools PFI project has introduced a
framework for competitive tendering of changes to PFI contracts.
Under the framework, work can be carried out by contractors from
the SPV's partners or those from the Local Authority's own list
of approved contractors. The SPV also agreed to follow the Local
Authority's recently revised requirements for tendering, depending
on the value of the work to be undertaken (Figure 3).[13]
Figure 3: East Riding of Yorkshire Schools
In the early years of the contract, the Local Authority accepted that the SPV would implement any changes using its own sub-contractors and procurement procedures. The Local Authority would verify that the proposed cost of a change was reasonable and in line with benchmark prices, before work was approved. As the project developed, it became apparent that there were opportunities to enhance value for money where work was being sub-contracted. The Authority, therefore, sought to introduce more transparent competition, if necessary using contractors from the SPV's contract partners or those from the Local Authority's approved contractor list. The SPV has now agreed to follow the Local Authority's recently revised competition requirements as below:
Up to £2,000: One oral quotation (confirmed in writing where over £500)
£2,001—£30,000: Three written quotations
£30,001—EU Threshold: Invitations to tender to at least three suppliers
Above EU Threshold: EU procedure
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Source: C&AG's Report, Case Example 6
14. In some cases, changes requested by the public
sector have reinstated requirements that were excluded from the
original contract for affordability reasons. One in five project
managers stated that work requested as a change had been considered
previously for inclusion in the original deal. In just under half
of these cases, work was taken out of the original specification
for reasons of affordability. In 2006, such changes ranged in
value from £17,000 to £17 million.[14]
15. Reinstating previous requirements does not
appear to be good value for money. Value for money depends, at
least in part, on whether changes are essential to the delivery
of the service and were required when the contract was being negotiated.
In such circumstances it would not be good value for money to
remove work from the original contract when potential suppliers
are in competition with one another, but then order the same work
later, when the project is being run by a single provider. On
the other hand, public authorities may be uncertain at the outset
whether they will definitely need an additional service. In such
circumstances, authorities will need to be sure that there are
mechanisms in place to ensure value for money, such as benchmarking
and agreed rates for undertaking changes.[15]
16. The Treasury considered that public authorities
needed to be careful when making large changes in the absence
of competition. The fact that changes were being made demonstrated
the flexibility of PFI deals, which is needed in contracts typically
lasting decades. This needs to be balanced, however, against getting
good value if the taxpayers' wider interest is to be protected.[16]
10 Committee of Public Accounts, Thirty-fifth Report
of Session 2002-03, PFI Construction Performance, HC 567 Back
11
C&AG's Report, para 2.4 Back
12
Qq 1-2, 46, 63 Back
13
Q 23 Back
14
C&AG's Report, para 1.10 Back
15
Q 32 Back
16
Q 4 Back
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