Competitive dialogue looks set to replace the competitive negotiated procedure for most PFI contracts. The bad news is that it is unlikely to reduce costs. In fact, it will probably increase them

Talk is cheap … except in the PFI. And with competitive dialogue, it’s not likely to get any cheaper. Competitive dialogue was introduced in the UK on 31 January 2006 for use in “complex projects”, where the authority cannot objectively define technical requirements and/or specify the legal or financial make-up of the project. It is likely that competitive dialogue will replace the competitive negotiated procedure for most PFI projects.

From the notice in the EU’s Official Journal to prequalification, the procedure is substantially the same as the competitive negotiated procedure. But once participants are selected, it changes, in that the authority opens a dialogue with each participant that results in a final tender. Participants may then only “clarify, specify and/or fine-tune” their tenders.

Competitive dialogue requires the significant commercial, technical and legal issues to be resolved before the selected bidder stage, whereas the competitive negotiated procedure allows scope for negotiation after the appointment of the preferred bidder.

Shifting the work, and the focus on detail, to earlier stages in the procurement process will create additional cost for shortlisted bidders. The authority also has to do more work in advance as the quality of bids received will depend on the quality of the authority’s invitation to participate in a competitive dialogue. This document needs to be clear and comprehensive. If it is not, the burden of working up the scheme will fall heavily on the private sector.

The perceived advantage for authorities is that the new process maintains competitive tension for longer and ensures greater certainty for them at selected bidder stage. By then, important issues and risks should have been resolved.

However, requiring resolution of legal and technical issues prior to final bids will only serve to increase private sector bidding costs “at risk”. It will, in effect, require commercial close with several bidders, rather than just one. The government should contribute towards these additional bidding costs (as on the upcoming Bristol PFI hospital deal).

It should adopt the principle recommended by Sir Malcolm Bates’ report on the PFI, namely that if an authority decides not to proceed with a project, and this is not related to the viability of tenders received, bidding costs should be refunded.

Shifting the work to earlier stages in procurement will
create additional cost for bidders

The selected bidder letter should also identify the issues still to be resolved and allow scope for dealing with project-specific issues that crop up. This flexibility is in the interests of both the private and public sector.

Being implemented in tandem with competitive dialogue is the use of a funding competition that is to take place after the appointment of the selected bidder. This presupposes that the selected funder will accept all documentation as tabled.

The process involves engaging legal and technical advisers to ensure project documentation is bankable and attractive to potential funders. However, this is done (without instructions) from a client “in absentia”. The funder, when on board, may not be in complete agreement with what has been negotiated by its putative legal and technical advisers. Conversely, there is no real lender to rein in the enthusiasm or excesses of the advisers during the negotiation stage. It will be interesting to see how this process develops.

The new rules are intended to encourage competition and reduce costs. They may, however, lead the private sector to do more work early on while bearing the burden of increased bidding costs, in what may be a longer bidding process.

There may also be an increased risk of loss of intellectual property with more design and technical development being undertaken by all bidders in parallel at the same early stage of the process.

The new process, being more prescriptive and potentially more expensive, does, however, give unsuccessful bidders more scope to bring claims against authorities for failure to comply with the stricter requirements.