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Could bidding costs kill PFI?

AGENDA - The costs and lengthy process involved in PFI bidding are turning contractors away from a procurement programme the Government loves to trumpet.Russ Lynch asks what can be done to lure them back?

FOR A Government always so keen to get private firms delivering public sector schemes through the Private Finance Initiative, an unwelcome change is in the air.

Mutinous contractors ? initially so keen to feast on the lucrative revenues from PFI projects ? are now choking after being force-fed for years on a diet of protracted, expensive bidding costs.

Confidence has been hit still further by the scrapping of three major PFI projects in the health sector this year. The £300 million redevelopment of Plymouth's Derriford Hospital was axed in July after two rival teams pulled out, leaving Amey as the sole bidder.

Bouygues ? the only competitor for the £350 million Whipps Cross project after Balfour Beatty withdrew ? was also left high and dry by the client.

This comes after the fiasco of the £1 billion Paddington Health Campus, which was axed before it even made it to the market.

Representatives from the Major Contractors' Group last week met Richard Abadie, head of the Treasury's PFI unit, to talk through a series of proposals put forward by the MCG in the hope of speeding up the glacial bid process.

This comes after a survey of MCG members expected this week showed only marginal improvement in PFI bidding. Compare the Treasury's reluctance to get to grips with bidding costs with the swift action it took to make sure the public sector claimed a fair share of refinancing gains, after private companies making a killing on earlier deals sparked a raft of critical headlines.

The Treasury has commissioned the Smith Institute to look into bid costs but refused to comment on the MCG meeting. MCG director Stephen Ratcliffe said: 'We went over a lot of same ground we have already covered with them. We have been pressing Government for the past year to speed up the procurement process and these talks were a part of that.' He added: 'It is a major concern when projects move slowly, or not at all, because it ties up valuable resources and bidding teams. We thought the Treasury would be further ahead in its thinking.' The MCG wants more standardisation and less detailed design at the start of the bidding process, which leads to vastly expensive and ? preferred bidder aside ? largely wasted outlay. It is keen to eliminate bidders earlier in the process and end the situation where two rivals draw up best and final offers ? both teams in effect presenting fully designed hospitals at great expense simply for the client to throw one away.

With such costs, it is understandable that companies are looking a lot longer and harder at the schemes they get involved with.

A senior industry source said: 'What has changed in the past six months is that among some major contractors the appetite for PFI is beginning to wane.' And the chief executive of one MCG company brought home how expensive it is to come second in the race for a major PFI deal.

He said: 'We came second on a £300 million PFI scheme earlier this year which cost around £9 million to bid ? and we were liable for around £2 million of that. First of all you have to shell out for a big-name architect just to get to the table, and then you're throwing money at consultants for months as well. I would get rid of a final stage with two bidders because it is far too expensive.

'You can budget for lost bids but it is a lot of money when you consider that in purely construction terms you're making around 1 per cent a year.

'We did a business model and found that if we didn't win between one in two or one in three of our bids, the whole thing was not viable anyway. The bid costs drive the need to win, so you drop the price to be more successful. Then you've got to try to make it pay in other ways.

'You are already finding contractors being selective about the market and if things don't improve they will walk away.' The issue is coming to the fore again at a time when the DTI is attempting to improve payment practices in the industry through changes to the Construction Act.

It all amounts to a spectacular failure in joined-up government as some major suppliers are attributing longer waits for payment to the impact of PFI bidding.

The chief executive of one major M&E firm said: 'We are finding it is taking longer and longer to get money out of the main contractors these days, and we believe it is because many have so much cash tied up in PFI bidding.' Figures from credit agency Experian seem to support the theory. Major contractors ? the ones pouring cash into PFI bids ? are taking 89 days to stump up, while small and medium-sized firms take 56 and 62 days respectively.

Norman Rose, the director-general of the Business Services Association lobbying group, also wants a crackdown on the consultants' fees that add to the PFI bidding bill.

Mr Rose said: 'Consultants can run up horrendous costs. The public sector will bring them in too and so will we. Depending on the complexity of the projects you're looking at between 5 and 10 per cent of the bidding costs.

'Both sides rely far too much on them. They add to the delay and I am in favour of paying them a fixed fee for an individual bid to get the process speeded up.' But for all the calls to crack down on fees and standardise designs, the key to improving the long and winding PFI road is a client that knows what it wants and how much it can afford to pay.

Mr Rose adds: 'If there is more procurement expertise before issuing a notice in the Official Journal ? if you know what you want, the deliverables and the budget ? it becomes clearer. Often it is only at the invitation to negotiate stage of a bid that the Government is working out what it needs and what it can afford. If you don't have an intelligent client, you're in t rouble.' The construction industry's patience is growing thin at footing a vast bill for major schemes where clients have unrealistic expectations about what they can get for their money. Meanwhile the whole debate tends to be carried out in a largely hostile media spotlight that hammers the private firm when it has the temerity to actually make money on a project.

Unless the Treasury acts to tackle the inherent problems in the bidding process, construction firms could soon be answering with a PFI of their own: Please, Forget It .