Press Release - Benchmarking and market testing the ongoing
services component of PFI projects
6 June 2007
Ensuring the public sector gets value for money from ongoing
services is an important discipline in a PFI contract, the NAO says
today. The NAO examined early examples of the public sector using
contractual processes to benchmark* and market test* the value of
these services. It found that value for money had been achieved
through the value testing process in about half of the cases. In
other cases including some where the private sector negotiated
price increases during these processes, the information available
suggested it was uncertain whether value for money was likely to
have been achieved through the value testing process.
The report details lessons that have been learned in these early
examples where services such as catering and cleaning were
value-tested, and states that there is now new detailed Treasury
guidance which public officials can call on when using these
processes. Facilities services account for a substantial part of a
PFI contract and, with increasing numbers of projects about to use
value-testing, typically after five years of a PFI contract being
in operation, the NAO has highlighted issues which officials need
to keep in mind when using these processes.
In examining the first nine projects to have completed value
testing the NAO found that value for money was demonstrated in five
cases. Two telecommunications projects achieved good value for
money with decreased prices of 19 and 37 per cent. In three
building projects, good value for money was achieved. Building
sector prices changed mainly by between -2 to +6 per cent after
public officials negotiated these down from a substantially wider
range of opening proposals for price changes. In four building
projects where prices increased the NAO assessed value for money
arising from the value testing process as uncertain – three being
hospital projects and one a schools project.**
Whilst the final price increases were fairly modest, they were in
addition to the annual contractual price increase for inflation,
and in some cases were achieved by projects agreeing to minor
service reductions, where projects considered services to have been
over specified previously. The projects did not expect the service
to users to be compromised.
The report sets out a legal opinion that, in a sample of early
contracts, clauses dealing with market testing and benchmarking
were often not well drafted which limited their expected
effectiveness, although the parties may still be able to conduct
effective value-testing procedures.
The NAO agrees with the Treasury that the competitive element of
market testing, if it can be applied successfully, will generally
be the mechanism likely to give the best value for money when value
testing facilities services. In the three market-tests carried out
to date – all of them in hospitals – there were bids by competing
providers. However, the present supplier won two deals and in the
other project services were brought back in house. The report
concludes that for market testing to work effectively in the future
there should be strong competition with external suppliers.
Sir John Bourn, head of the NAO, said today:
“It is important that public officials test the cost and quality of
facilities services to get value for money during the life of a PFI
contract. My report highlights lessons in how value-testing should
be carried out. In particular, public officials must have the
necessary skills, must promote vigorous competition when value
testing, and they must have a full understanding of whether and how
the private sector’s price and service proposals offer value for
money.”
The report recommends that the recent Treasury
guidance be taken up by departments and that the Treasury should
continue liaising with departments to identify suitable cost data
to use in benchmarking. The NAO also urges that further steps
should be taken to compare the cost and quality of facilities
services under the PFI with conventional outsourcing
experience.
Notes for Editors:
*Benchmarking is the process by which the project company
contractor compares either its own costs or the costs of its
subcontractors against the market price of equivalent
services
Market Testing means the re-tendering by the project company of the
relevant service so that the Authority can test the value for money
of that service in the market
** Sussex Partnership NHS Trust, University Hospital of North
Durham, Queen Elizabeth Hospital Greenwich and Debden Park High
School.
- Press notices and reports are available from the date of
publication on the NAO website, which is at www.nao.org.uk. Hard
copies can be obtained from The Stationery Office on 0845 702
3474.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office which employs some 850 staff. He
and the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 27/07
All enquiries to Neil Gadhok, NAO Press Office:
Tel: 020 7798 7020
Mobile: 07796 940746