NAO calls for PFI change

by Carol Millett



Preferred bidders for private finance initiative projects should only be appointed after all the key points have been finalised and there should be separate tenders for the construction and finance elements, the National Audit Office said this week.

On the eve of the NAO's publication of its PFI good practice guide for the public sector - Examining the value for money of deals under the private finance initiative - assistant director general Jeremy Coleman told Contract Journal: "We are strong on the need for competition throughout the process. The preferred bidders should not be chosen early. We don't think this is a good idea because experience shows that Government departments are at a negotiating disadvantage once the preferred bidder is chosen. The price tends to go up and the quality goes down during exclusive negotiations and changes to the process are not tested in the market, so there is serious risk to the value for money a deal holds if the preferred bidder is chosen too early."

Coleman said NAO was not in favour of taking more than one bidder "to the wire," but added: "However the key terms shall be determined competitively."

Coleman continued: "These days more and more people are saying the finance can be done later and separately. So Government departments should go to market for the project and get the finance in place later as a separate but competitive process."

A leading facilities management contractor responded: "The move to separate the financing provision from the service provision is a retrograde step. Funding for PFI projects is widely available at competitive rates. This is not an area of PFI that needs fixing."

He also opposed NAO's recommendations on preferred bidders: "This flies in the face of the recommendations of the first Bates Review, which recommends reducing costs to the private sector. There is a tendency to cherry pick recommendations which are liked and to reject others. NAO should realise that, by increasing bid costs, the effect will work its way into bids and the clients will end up paying in the long term."

Giles Frost of solicitor Wilde Sapte said: "Bid costs will go up further and to some extent it is the inability of the public sector to manage the process themselves. In complex private sector projects, no one would ever dream of taking more than one bidder so far into the negotiating process. One reason is the private sector has the confidence that it can manage the bid process."

The proposal to separate the finance package was also met with alarm. A top PFI banker warned: "This will make the process far more time consuming and expensive. It will also take away the interaction which presently exists between PFI teams and thereby much of the innovation and flair."

David Hickman, head of PFI at law firm Hammond Studdards, concurred: "PFI deals work better because contractors can get the banks and the equity on board at an earlier stage. It also enables the public sector client to get to know the other side that much earlier, giving them confidence in the financial package they are getting. Another concern is that banks may not want to finance the deal if they have not had any input into the terms of the project agreement."