Good news for PFI from the National Audit Office?

Within the space of a week the National Audit Office (NAO) released two reports that contain good news for PFI and the PFI procurement process. Both reports relate to PFI as a choice of procurement route but cover two very different subjects: construction performance and single bidder projects. We comment briefly on both reports and welcome the positive conclusions.

PFI: Construction performance

The NAO posed the following hypothesis: "PFI will deliver price certainty for departments and timely delivery of good quality assets" and then tested this hypothesis in the market place. On the 5 of February 2003 the results were set out in a report. The conclusion? Most PFI projects are delivering price certainty to departments and are completing on time.

Cost

The statistics in percentage terms make interesting reading. The PFI procurement method is compared to the historical route of construction procurement used by the public sector. In 2001 the report "Modernising Construction" (another NAO publication) stated that some 73 per cent of departments' and agencies' construction projects had run over budget for the public sector. This figure has been contrasted against the results in PFI where, according to this latest report, only 22 per cent of those surveyed had overrun budget.

Some important notes accompany the statistics. In particular, it's noted that none of the increases in PFI price after contract award were due to changes led by the consortium alone. The conclusion to be drawn is that the increases in price have arisen out of "variations" as we know them in PFI procurement. These must have been prior to completion of the new facilities and - whilst not emphasised in the report - the statistic serves to illustrate the discipline that PFI has brought to the public sector in respect of changes to original scope. This is largely due to the way in which a PFI contract is actually structured (the capacity and opportunity for the private sector to argue that a variation has been effected is more limited than traditional standard form contracts and the variation procedures are more collaborative and refined). PFI variation procedures also introduce tighter controls on cost and on the ability to implement variations that have a consequential effect on price.

Timing

The NAO also quotes statistics on timely delivery. They found that PFI has resulted in an improvement over previous public sector construction experience (75 per cent on time compared to 30 per cent under traditional procurement). Overall, the report is a positive one and, if evidence were needed, could be cited as an endorsement of the merits of PFI procurement where time and cost are concerned. This is just as well given these are two of the primary drivers for PFI quoted by the Government in the earlier days of PFI.

At 14 paragraphs the executive summary of the report is short and makes good reading - even if you don’t delve into the detail of the report itself.

Single Bidder PFI's – the Libra project

The report into the Libra IT project is less enchanting but some very positive recommendations are made by the NAO. The Libra project was for the procurement of new IT systems for Magistrates Courts and only a single bid was received. The report highlights the problems that can be encountered when only one bid is received for a PFI project. The lack of competition and absence of the associated benefits of competition had detrimental effects on the project in this case. The PFI market is generally consolidating at the moment (in terms of the number of bidders) and the reasons why we are increasingly seeing very few, one or no bidders must be addressed by the public sector.

The NAO report recommends that procuring authorities should re-evaluate their procurement if there is only a single bidder. Few or single bidders should sound as a warning that the proposed PFI project may not be viable (financially, technically or for both reasons) – especially if few bidders show interest and/or others withdraw as the procurement process continues.

Departments should do their homework

Certain other lessons are borne out by this NAO report. The preferred bidder in the Libra project was chosen despite the procuring authority being aware of problems the bidder was having with another government IT project. The NAO report makes it clear that the procuring authority should have satisfied itself thoroughly as to the technical competence and ability of the preferred bidder to deliver a project of such size and complexity. In fact, the report concludes that when seeking a reference on a potential contractor, a department "should obtain an assessment of the contractor's performance within government." All bidders should note that the public sector market could come to look very small if you are performing poorly!

This report contains another 7 recommendations. One of these is closely related to the time and cost implications referred to in the first report discussed above. Recommendation 7 reads "where departments are renegotiating contracts, they should benchmark the price the contractor is offering". This should be construed against the particular facts of the NAO report (the Libra PFI contractor's financial model was not examined prior to financial close and the bid price at financial close was £184 million but was £557 million at the time the NAO report was issued albeit following some renegotiation and reshaping of the deal). However, the private sector should put a watching brief on this sentiment regarding benchmarking prices. Especially with the potential for large scale variations on projects – something we believe will become more common as more projects come on stream and the public sector's requirements evolve over time.

Conclusion

The two reports offer food for thought. They are generally good news for the private sector in providing evidence that PFI as a choice of procurement is performing strongly and in setting out guidelines for the public sector that should ensure only viable projects are put out to tender in the first place.

The PFI Construction performance report can be found at: http://www.nao.gov.uk/publications/nao_reports/02-03/0203371.pdf

The report into the Libra project can be found at: http://www.nao.gov.uk/publications/nao_reports/02-03/0203327.pdf

For further information please contact Richard Guit at [email protected] or on +44 (0)20 7367 2946.