2 Procuring the
PPP contract
9. In 2000, the scope of the NRTS project comprised
extending the trunk fibre optic cable network to create a core
resilient network covering the motorways linking London, Bristol,
Birmingham, Manchester and Leeds. The Agency hoped that the contractor
would renew some life-expired assets and generate revenues through
commercial exploitation of these assets. The estimated cost of
the project, net of expected revenues was £40 million[12]
(present value, 1999 prices).[13]
10. In March 2001, eight months after starting
the procurement, the Agency increased the scope of the project
to include upgrading the communications technology and installing,
operating and maintaining local connections that linked roadside
devices to the trunk cable network. The change in scope resulted
from potential economy and efficiency gains that the Agency considered
it could achieve by incorporating other motorway telecommunications
projects into NRTS. Under the changed scope, the contractor would
also have end-to-end responsibility for transmission of information
between the control centres and roadside devices.[14]
11. Market interest weakened during the procurement.
In August 2001, the Agency invited potential bidders to express
their interest in the project and so commenced the competitive
stage of the procurement. Interest fell away, however, during
the 17-month long short-listing process. The Agency dispatched
a pre-qualification questionnaire to those parties that had expressed
an interest in the project. Nine of the responding parties returned
the questionnaire, from which the Agency judged six were suitable
for short-listing. The Agency underestimated how long it needed
to complete preparation of its bid documents.[15]
12. Some potential bidders showed signs of losing
interest after they had waited nearly a year to discover whether
they had been short-listed. To re-stimulate the market, the Agency
re-published its notice in the Official Journal of the European
Communities in August 2002. Two of the stronger potential bidders
that had responded to the first notice did not reply. In December
2002, the Agency short listed the four sufficiently qualified
bidders that remained interested in the project. Two of these
dropped out of the competition shortly after receiving bid documents.[16]
13. There was a significant difference between
the pricing offered by the two remaining bidders, LINK (a Serco
led consortium) and GeneSYS. In the three competitive bidding
rounds, the Agency's assessments of LINK's offers revealed them
to be more expensive than GeneSYS's offers by between £230
million and £280 million (Figure 1).[17]
14. The Agency wanted to transfer the risk of
operational performance of the existing telecommunications assets.
The Agency, however, possessed all available information about
the performance of these assets. The Agency collected together
as much material as it had about the assets, but was not prepared
to warrant the accuracy of the information because it did not
want to compromise the intended risk transfer. GeneSYS was prepared
to accept the risk transfer, but only on the basis of its own
due diligence of the condition of the existing assets.[18]
15. After receiving initial bids in July 2003,
the Agency conducted an affordability review that resulted in
a 168 kilometre reduction in the amount of fibre optic cable that
the contractor would lay in the first two years of the contract.
While the Agency left 110 kilometres of fibre optic cable laying
in the contract, it used conventional procurement means to install
168 kilometres of fibre optic cable between 2003 and the award
of the NRTS contract in 2005. As a result, the Agency itself laid
some of the cable it originally planned to include in the NRTS
deal.[19]
16. When the Agency started the procurement in
July 2000, it expected to complete the process in 21 months, for
a cost of £3.1 million in advisers' fees. The procurement
took over five years to complete, and the advisers' fees amounted
to £15.5 million. Some of the growth in the procurement can
be explained by the two major changes in the scope of the project
and in accommodating changes in traffic services that occurred
during the procurement, in particular, the Government's decision
to bring forward the replacement of 32 Police Control Offices
with seven Regional Control Centres and the introduction of the
Agency's traffic officer service.[20]
17. The majority of the increase to both the
procurement timetable and the budget, however, can be attributed
to the Agency's desire to produce high quality, clear and unambiguous
bid documents. Neither the Agency nor its advisers, a consortium
called KHHD (comprising KMPG, Herbert Smith, Hyder and Detica),
had any real understanding of the amount of work required to meet
the desired quality (Figure 2). With the Agency almost
completely dependent on its advisers for the production of the
bid documents and other procurement related material, the Agency
needed good controls to ensure that its advisers were performing
their obligations efficiently, particularly since the advisers
were being paid on the basis of hours worked.[21]
Figure 2: The procurement timetable progressively increased from
21 months to over five years and the budget increased from £3.1
million to £15.5 million
18. Ultimately, the Agency had no effective incentives
to influence the behaviour of its advisers. The Agency had only
two members of staff dedicated to the procurement. These individuals
not only reviewed the considerable volume of material prepared
by the advisers, but also had to oversee, on average, a £250,000
monthly spend on advisers. While they focused on the production
of quality documents, controls over the advisers were allowed
to slip.[22]
19. Although the Agency was over-reliant on the
good faith of its advisers, the two members of the Agency's staff
dedicated to the project remained in post throughout the procurement
and the two-year long build phase of the contract. The Agency
benefited from their detailed understanding of the project and
their insistence on high quality bid and contract documents, particularly
when during the preferred bidder negotiations, there was no substantial
slippage in risk transfer, and GeneSYS's offer actually fell by
£2 million.[23]
20. The Agency's bargaining position in the negotiations
also benefited from the detailed knowledge that the Agency and
its advisers had acquired about GeneSYS's pricing bases from the
financial and cost models that the bidders' submitted as part
of their bids. In September 2005, the Agency awarded the 10½-year
NRTS contract to GeneSYS, a special purpose company owned by Fluor
Corporation and HSBC.[24]
12 The NAO calculated that GeneSYS's accepted offer
had a present value of £345 million in 1999 prices when deflated
using the Office for National Statistics' Retail Prices Index
CHAW (all items); C&AG's Report paras 1.19, 1.21; Figure 8 Back
13
Qq 7, 19, 27; C&AG's Report, paras 1.13, 1.15 Back
14
C&AG's Report, para 1.19 Back
15
C&AG's Report, paras 2.12, 2.13; Figure 10 Back
16
C&AG's Report, paras 2.13-2.15; Figure 11 Back
17
C&AG's Report, para 2.18; Figure 13 Back
18
Qq 23-25; C&AG's Report, paras 2.2-2.4 Back
19
Q 6; C&AG's Report, paras 2.15, 2.36-2.37; Figure 17 Back
20
Qq 7, 19, 21-22; C&AG's Report, paras 1.19, 2.28, 2.36-2.37,
3.2-3.3; Figure 7; Appendix 5 Back
21
Qq 2, 4, 20, 30, 37-38; C&AG's Report, paras 3.5-3.8 Back
22
Qq 28-35; C&AG's Report, paras 3.7-3.8; Appendix 5 Back
23
Qq 2, 4, 20, 28-35; C&AG's Report, para 3.6 Back
24
Q 20; C&AG's Report, paras 1.20, 2.24-2.25, 2.38, 3.6 Back
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