HM Treasury: tendering and benchmarking in PFI
Publication of 63rd Report 2006-07
Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:
"The process by which PFI projects are tendered has not improved since our Committee last reported on the topic, four years ago. In some respects, it has got worse. If the public sector is to get value for money from the deals, then the market must be truly competitive. What we find instead is that a third of recent projects attracted only two viable bids. This may well become an even bigger problem than it is at present.
"The average length of tendering time is now nearly three years. Schemes are thereby delayed and market interest weakened because the costs of making a bid are driven up. And the lack of PFI expertise among the public sector procurement teams is resulting in poor negotiating with bidders who often have the whip hand. The public sector must not be placed in this vulnerable position.
"PFI deals were supposed to give us certainty about the long-term costs of providing public services. The reality is different. Benchmarking and market testing of the costs of delivering ongoing services under PFI deals - such as catering and cleaning - have in practice led to increases in prices of up to 14 per cent. The value for money is in some cases uncertain.
"I am very concerned at evidence that public authorities are cutting such services to keep the PFI contracts affordable."
Mr Leigh was speaking as the Committee published its 63rd Report of this Session which, on the basis of two reports by the Comptroller and Auditor General, examined whether the PFI tendering issues highlighted by the Committee in 2003 are being addressed and the early experiences of the small number of PFI projects that had carried out value testing up to summer 2006.
Under the Private Finance Initiative (PFI) there are now 800 contracts with private sector suppliers for services worth in total £155 billion up to 2032. To achieve value for money, all stages of a project have to be managed effectively, including the tendering process, when procuring authorities invite tenders and select a winning bid for the contract. In 2003 the Committee highlighted a number of issues regarding the PFI tendering process and concluded that the taxpayer was not always getting the best deal from PFI contracts because good procurement practice was not being followed.
Four years later these concerns remain and the Treasury has done little to apply what it has learned from the large number of PFI deals that have now been signed. There has been no improvement in tendering times, significant risks to value for money continue to be taken when public authorities make late changes to deals, and there is a continuing lack of skills and experience in public sector PFI teams. As a result, there are signs that market interest is weakening, with fewer serious bids for recent deals.
The cost of ongoing services provided under the PFI is a significant element in overall costs and in the value for money of deals which may run for up to 35 years. Most contracts include provisions for testing the value of services such as catering or cleaning, typically every five to seven years, by comparing information about the current service provider's provision with comparable sources (benchmarking) or inviting other suppliers to compete with the incumbent in an open competition (market testing).
The early experiences of these value tests show that PFI contractors are using these processes to secure price increases and that some authorities are cutting services to pay for them. There is also a lack of comparable data to check whether prices proposed by incumbent suppliers are competitive. So business cases for long-term PFI contracts, where services could be otherwise procured conventionally through short term contracts, need to be tested against a robust range of price scenarios, to show that the value for money case is insensitive to possible price increases