Unsuccessful bidders for private finance initiative construction contracts complain of huge costs due to the detail demanded by clients up front. Some have said that in future they will be far more cautious about getting involved in the PFI tendering process.
This week we ask: can the cost of bidding for PFI projects be justified?
PFI has dramatically changed the way in which public services are provided. Across the public sector, the private sector is delivering services and facilities which are privately funded, built and maintained at affordable prices. Additionally, if the private sector fails to deliver it does not get paid.
In all ways PFI represents good value for the UK taxpayer and this has been confirmed by National Audit Office studies.
The cost of bidding and closing PFI contracts is within the price negotiated by the private sector and affordability comparisons. Therefore, the costs incurred are explicitly justified.
However, if PFI is to continue as a preferred procurement method, it must build on its initial success by significantly reducing the cost of procurement. It cannot be acceptable that the cost associated with establishing new processes is allowed to continue at a similar level.
The lesson learned in negotiating contracts and clauses must be reflected in future contracts. It is unacceptable to spend money repeatedly negotiating issues, though we must remember that even traditional forms of contract such as JCT 80 suffer from this.
If PFI is to continue to provide value for money, standardised contracts, schedules and payment mechanisms must be achieved.
Tenders should not be sought until the documentation, including the clients' requirements, has been completed. The public sector must also make certain the appropriate level of detail is requested at each stage. This will ensure that bid costs are expended on developing the service delivery and improving value for money.
The high cost of bidding has been justified to achieve the changed method of providing public services, with the private sector being paid by results.
Neither the public nor the private sectors should be content: we must work together to drive out unproductive process costs.
The PFI programme is now making a major contribution to the delivery of public sector buildings. It is time, therefore, to improve the procurement procedure presently being adopted more widely across the public sector.
Tendering consists of several major stages before selection of a preferred contractor. An enormous amount of information has to be provided by all parties.
Costs to each bidder can be very substantial.
Although we design for whole life performance and pay careful consideration to issues like operating costs and maintenance as well as construction, I am surprised how much 'up front' building design work is required at bid stage. Granted, public bodies have to be seen to be getting best value for money, but there is no need to overdo matters. Do we really need to prepare 1:50 detail sections through parts of the building structure, for example?
The ability to cut back whole life cost has usually prevailed in successful bids. Having demonstrated their ability to manage post construction costs, I see no reason why clients should not start saving at the front end as well. Outline design with a detailed specification is all that is actually needed before selection of preferred bidders.
Consideration should also be given to reducing the number of bidders after pre-qualification.
There are many successful one stop bidding methods producing cost efficient contracts now being adopted in the private sector. Perhaps these should be looked at in more detail by those controlling the purse strings in the public sector.
It has been suggested that the client should contribute to the costs of all bidders. However, it would be better to simply put in place a more efficient tendering process.
Consultants, contractors and financiers participating in the PFI are all trying to realise the recommendations of the Egan report. Surely the method of bidding should be an integral part of that cost reduction exercise.
Cheaper bid procedures produce cheaper contracts and therefore cost less taxpayers' money.
Over the three year period covered by the Comprehensive Spending Review approximately £11bn of infrastructure investment will be privately financed. This is 30% of net publicly sponsored or funded investment.
The first four PFI Highways Agency road contracts are forecast to generate savings of around 13%. They are for design, construction, finance and operation of the M1 - A1 link road near Leeds; the A1(M) widening between Alconbury and Peterborough; the A419/A417 between Swindon and Gloucester; and the A69 between Carlisle and Newcastle-uponTyne.
In the latest review of the private finance initiative Sir Malcolm Bates called on public sector clients to take on board private sector financing skills to improve the management of advisers, negotiation with bidders, evaluation of deliverability and identification of new project opportunities.