Don't back a two-horse race

It has been reported in these columns that the public sector may be moving away from selecting a single preferred bidder at "best and final offer" stage on private finance initiative projects. Instead, it believes that in order to secure "best value for money" it must conduct parallel negotiations with two bidders until financial close.

The predictable response from the private sector was that, although matters have improved marginally, the process of achieving financial close is still tortuous, burdensome and long-winded. It is not prepared to contemplate the prospect of negotiating to the wire at its own cost without preferred status.

No serious arguments were advanced to contradict the public sector's premise that lack of competition in the latter stages results in inflated unitary payments. Instead, the private sector argued that the losing bidder should be reimbursed a substantial proportion of its bid costs by the public sector.

The new system does not seem to me an attractive solution: what is the point of tying up the private sector's resources – contractors' management teams, bankers, lawyers, designers and so on – in this futile exercise? How, too, is the public sector intending to staff this? There is already a shortage of public sector employees capable of negotiating PFI deals. If a system of parallel negotiations was introduced, the public sector would need to double its manpower to staff it effectively. The co-ordination of two sets of negotiations would also assume nightmarish proportions.

It would also become relatively clear, perhaps even at BAFO stage, which contractor was being used as the stalking horse. If this was obvious to the bidders themselves, then the whole purpose of the exercise would be defeated. Even if it was not obvious to the bidders but only to the public sector body, it would be a pretty dispiriting exercise for the public sector team responsible for continuing negotiations with the likely loser.

As I have noted above, there does not seem to have been any real challenge to the public sector's premise: namely, that in the absence of competition, it does not receive best value for money. Perhaps this is because it is not possible to prove or disprove and, because no project is ever identical with another, it will never be possible to make true comparisons between them.

The argument in favour of the new system is superficially appealing – in an environment where risk transfer is a major issue and partnering not an option, there must be a chance that, as the risks of the project are slowly defined by negotiation, and as the two contractors would be, at least in theory, in a competitive tender, a more cautious view of pricing will develop. That perception is inevitable and it is impossible in any event to prove that it does not happen.

It would become relatively clear, perhaps even at best offer stage, which contractor was being used as the stalking horse. If this was obvious to the bidders too, the exercise would be defeated

Surely, though, the key to all this lies in that perception? BAFO bids on PFI projects are generally submitted on the basis of detailed heads of terms for the concession agreement. Even detailed heads of terms do not, by definition, define risk transfer at a level that allows final pricing.

But why cannot the public sector spend more time and effort itself in the early stages of the project? If it thinks through all aspects of risk transfer, it can produce a draft of the concession agreement for pricing on a proper basis. In the early days of the PFI, it was arguable that this might be wasted effort, because there was no clear understanding about the risk which the private sector and its bankers would be prepared to accept. That cannot now be a valid argument in sectors where there are already pathfinder projects: the PFI has enough of a track record to enable the public sector to embark on preparing a concession agreement with confidence.

This sort of approach surely has many attractions:

It means that the public sector thinks through the project at the outset. It would presumably enable more accurate assessment of the public sector comparator and, indeed, force the public sector at the outset to establish whether the project was truly viable.

It may result in the public sector incurring more initial cost and perhaps even carrying out more initial design work itself in order to establish its baseline requirements. Provided, though, that the rules for drafting output specifications were observed, this should not significantly impact on ultimate risk transfer. It would then enable the public sector to invite truly competitive bids.

The private sector may incur higher bidding costs up to BAFO stage, but it would know that it does not face the endless negotiations thereafter to financial close. Clearly, some negotiation would still be inevitable but would not be overwhelming.