Protracted negotiations are the scourge of the PFI, so why don't we take a cue from international diplomacy and use ‘sherpas' to work out the ground rules first?
In March the Treasury announced its commitment to £26bn of PFI and PPP contracts. In its report, Strengthening Long-Term Partnerships, it indicated that PFI/PPP will continue to play a big role in procurement for the foreseeable future. The title of the report hints at the difficulty faced by private and public sectors when it comes to securing what may sometimes be an elusive deal. Long-term partnerships usually need to be preceded by long-term negotiations.
The skill, then, is to find a way to smooth out negotiations with a view to reaching a deal more quickly and to avoid sticking points. In the field of international diplomacy, this job is handled by so-called "sherpas", who help politician to success at the summit .
The Treasury says that procurement time remains "unnecessarily long, taking on average more than two years from Official Journal advertisement to financial close". One of its recommendations is that the public body ensures that projects are better prepared, especially as regard to scope and requirement, before formal engagement with the market. Inadequate preparation may lead to problems with affordability and design variations.
In several projects I've been involved with, such as large-scale waste and defence procurements, we have successfully used a "convergence" process before the invitation to negotiate is issued. This allows the parties to "shape" the deal in a way that is likely to make it ready for the market when the invitation to negotiate is issued. Having observed this process from both sides of the fence, I think that it will encourage the public sector to be more realistic about what can be asked for, and the private sector to be franker about what can be supplied.
Several large projects have used this process recently and in each case the parties have seen it as a real opportunity to put down markers as to what can be accepted in the deal that emerges at the end of the procurement process. Two examples of issues that were addressed were the bidder's willingness to accept the risk for the value of the assets at the end of the 25-year contract period, and contaminated land.
Fundamental obstacles, such as open-ended liabilities for the risks mentioned above, can be identified at this stage so that both parties can see the ground rules and identify where the public body's requirements will not be acceptable to the market.
The skill, then, is to find a way to smooth out negotiations, with a view to reaching a deal more quickly and to avoid sticking points
The process should not be seen as an opportunity to "dance around handbags" in the sense of avoiding dialogue or as a marketing exercise. The intention should be to produce consultation and dialogue between the authority and prequalified bidders so as to agree a stance on specific issues and clarify expectations for further negotiations.
The public sector may be able, at the end of this process, to identify issues that the market may swallow, albeit at a price, and those that it will not bear. The private sector can indicate what it is able to provide in those areas where expectations may have to be adjusted.
Properly undertaken, the process should lead to an invitation to negotiate that the market can clearly price.
Public bodies will need to be cautious to avoid any suggestion that those that are participating will be given preferential treatment or risk breaching European competition rules. The process can be used to reduce the numbers of companies invited to tender. Discussions will need to be confidential, but the public sector could build in a requirement that in general terms the results can be inserted into the invitation to negotiate as an indication of scope for the market.
The PFI has had a variable impact on the market. Some complex areas, such as IT, will probably not use it any further; in others, such as health and education, it is established; and in sectors such as waste disposal and for complicated technical deals it can be regarded as an emerging multibillion-pound market. It is probably in the last category that convergence will be of greatest use as it is here the market is often untested with no clear ground rules laid down.
Richard Dyton is a partner at Simmons & Simmons Projects Group