Public & Private

Government and European Union rules require contractors and developers in the housing market to compete to deliver public sector services and regeneration solutions.

But the competition process is over-regulated, creating delays in the delivery process and crippling the industry. The over-zealous application of the competition process is costly for the public and private sectors alike, as delays in procuring projects can expose schemes to inflation and excessive procurement fees.

Now prime minister Tony Blair has upped the ante. The latest mantra is delivery, delivery, delivery. Pressure is being put on civil servants who are passing the message on to people on the ground, accompanied by more money to fund the delivery of public services. In the private finance initiative sector, for example, total spend in 2001/02 was £674m across government departments. Allocations are set to be increased so that by 2005/06 the total will be £2.7bn (see graphic).

If Blair's challenge is to be met, the market must, as a matter of urgency, be encouraged to participate to deliver the promised investment.

In the public-private partnership and PFI sectors the cost of competition is driving players out of the market, rather than helping to secure value for money. For example, on housing PFI schemes, in the first round we were seeing between five and 10 consortia expressing an interest in bidding for schemes. In the second round, some councils are receiving as few as two expressions of interest. A further problem is that there are only so many people in the market to deliver these schemes. So unless the schemes grow, without increasing the number of projects promoted each year, the market will run out of capacity.

The Office of the Deputy Prime Minster has set up the Strategic Partnering Task Group to find new ways to improve procurement processes and deliver better-quality services. Meanwhile the government's PPP advisory vehicle, Partnerships UK, is promising it will "free up the market and deliver". But we can only watch with bated breath to see whether their rhetoric bears fruit.

The tightening up of accounting rules in the sector also has impacts. The need for companies to recognise bidding costs in the year that they were incurred has meant many organisations in the PFI sector have had to take a write-down on their profits. The accounting changes mean that a contractor or a bidder can only start to capitalise its bid costs into a project when it has won a contract.

The balance of the bid costs should be written off against profits in the financial year they were incurred. This change would result in reductions in the stated profits, but would go a long way to easing the fears of nervous shareholders.

Longer-than-expected lead-in times to projects, spiralling bid costs and uncertain success rates are giving some company boards a serious case of the jitters. In response, bidders are being more selective or simply withdrawing from the sector altogether.

Government delays
Many PPP and PFI projects are large – £100m to £200m. The cost of a delay in implementing such contracts is massive. Construction cost inflation is estimated to be anything between 6% and 9% per annum.

This level of inflation is hopefully a short-term issue, but on a contract of £100m a year, delay might increase the costs by £900,000. Ultimately, the public pays for this.

And, of course, it excludes professional fees, consultants' fees and the councils' and contractors' internal costs. All these have to be paid from somewhere – by either increasing the cost of the contract to the public sector, or by the contractor in the private sector requiring higher returns for the projects that it wins.

The Office for Government Commerce wants to make the market more efficient. To do this, there need to be larger projects, cheaper, more efficient bid processes and timely procurement processes. All of this will help to encourage investment on the ground and help Blair and his friends to fulfil their promises.

At the end of the day, the government has two options: to accept that there will be fewer competitors in the sector, resulting in a monopoly by providers, or to help to reduce bid costs or provide budget bid costs to be capitalised in the contracts. The latter would force the public sector to be proficient in its procurement methods and timing of projects – in turn, requiring ODPM departments to sign up to service-level agreements with local authorities to deliver certain answers within set time frames.

The market is sophisticated and it is possible to have efficient and cost-effective bidding processes while achieving the same level of value for money which is achieved through a full European Union Official Journal procurement process. Action must be taken quickly or the market will be squeezed and there will be no one to implement any projects.