Sir John Bourn, Head of the National Audit Office, told Parliament today that the funding competition used to finance the refurbishment of the Treasury building in Whitehall saved the taxpayer £13 million.
The competition resulted in savings of 7% of the cost of the deal over the lifetime of the project and assisted greatly in getting standard PFI contract terms and conditions accepted by financiers, thereby simplifying the PFI procurement process.
The use of a funding competition in a public sector project was innovative and therefore involved some risk, which the Treasury and its advisers managed effectively. The successful outcome was dependent on the strong project management teams assembled by the Treasury and Exchequer Partnership, assisted by experienced and well qualified advisers.
The report notes that there had been a hiatus in the procurement of the deal and therefore there were good reasons for the Treasury to inject further competition into the project using a funding competition. The success of this competition raises the question as to whether funding competitions should be used in future PFI deals. The report recommends:
Departments should always consider whether a funding competition will improve value for money
In order to ensure that competitive pressure is maintained, departments should reserve the right to require a funding competition to be held. But there are substantial risks involved in running a funding competition and many projects might not be suitable. Before deciding whether a funding competition should be held the department must consider many factors such as the complexity and size of the project and the experience of the project management teams and their advisers.
Funding competitions require thorough preparation
Once a decision to pursue a funding competition has been taken, the process needs to be well planned. The department will need to be supported by high quality advisers selected through competition. Wherever possible, departments should use the standardised PFI contracts issued by the Office of Government Commerce.
Always examine bidders’ funding arrangements
Given the risks and complexities of a funding competition, a department may rightly decide that a funding competition is not appropriate. In this case the department should examine the final funding proposals of the bidders to ensure that they are competitive. Departments should aim to incentivise bidders to seek the most cost effective form of financing.