Money for nothing?

Although still in its infancy, the introduction of competitive dialogue in public sector spending has served to hinder rather than help. By Andrew Briggs

There is a theory about spending money. Spend your own on yourself and you value price and quality. Spend your money on someone else, and it’s price that matters. Quality counts if others spend their money on you. But spend someone else’s money on someone else, and nobody gives a damn. That is why we have competitive dialogue rules.

Government accountabilityPrivate sector business is accountable for the way it allocates resources. Individual organisations, and the market as a whole, have clear economic indicators to help develop policy and evaluate its implementation. Their main message is profit, and only the innovative and the efficient make it and survive.

Like business, successful government combines good policy with efficient delivery. But the business of delivering public services does not benefit from similar economic messaging. As a result, there is less transparency, and accountability, in the way that government allocates resources – and it is far less efficient as a result.

The UK Government spends more than £500bn a year, without natural checks and balances to ensure it gets value for money. In 2005, Arts Council England spent £77,000 sending four artists to the North Pole to build snowmen. The RAF awarded a £2,500 retraining grant to aircraftwoman Stephanie Hulme to leave Northern Ireland and retrain as a lap dancer. Poor policy or bad value for money (or possibly both)? Only truly catastrophic failure brings with it ultimate accountability: take the Millennium Dome, where it was a story of sponsorship and a passport application, rather than a £300m cost overrun, that cost Peter Mandelson his place in government. A recent study estimated that inefficiency added 15 per cent to UK Government spending. If this is right, our Government wastes nearly £20bn a year, a sum equivalent to nearly 4p on income tax or 25 per cent of this year’s NHS budget.

The EU recognised this problem as early as the 1970s. It saw that public officials had little motivation to ensure best value in procurement and service provision, often favouring local or relationship partners at the expense of better value. As a result, in 1971 the European Community introduced a regime that helped those officials to behave more like the private sector.

At the heart of this regime was the requirement to tender competitively contracts for significant Government expenditure and award contracts only on the objective bases of quality and price. In passing, the regime also facilitated free movement of goods and services and promoted inter-state trade – manna to the architects of the single European market. Almost all procurement law as we now know it stems from this first regime.

Upsetting the balanceBecause of their complexity, competitive tenders for UK PFI contracts are time-consuming and expensive. Accordingly to UK industry body the Major Contractors Group, for a school PFI project average bid costs were £2.4m in 2005. For hospital projects average costs rose from £7.7m in 2003 to £11.5m in 2005. Bid costs represent 6 per cent of overall project value.

For the public sector, maximising competitive tension is fundamental to ensuring best value. It is vital to ensure sufficient bid development (in terms of design, pricing and risk allocation) by the end of the competitive process to have a clear view of the proposal that offers best value. The high-water mark of this process would be to have fully developed technical, financial and legal packages with each bidder, recognising the cost of doing so.

However, current market practice has developed to select provisional winners (so called preferred bidders) with a lesser degree of bid development. This reflects a workable balance between two competing needs: on one hand, the need of the public sector to maximise competitive tensions and, on the other, the need for public and private sector to use human and financial resources in the most efficient way.

The advent of competitive dialogue may upset this balance. It has been with us for nearly a year, having become law in the UK on 31 January 2006. While some competitions have continued #launched under the new regime (such as the Ministry of Defence SAR-H project), none has yet reached preferred bidder stage. However, signs are starting to emerge that application of the new rules might drive change and undermine, not enhance, the efficiency of a typical UK PFI procurement process.

Ringing the changesAlthough there are many similarities, the competitive dialogue is different to the old world of the negotiated procedure in a number of important ways. Specific rules now govern critical decisions towards the end of the process. On conclusion of the ‘dialogue’ phase, final tenders are submitted, which must contain all elements necessary for the performance of the contract. These final tenders can be ‘clarified, specified and fine-tuned’ – tortuous terminology that has its root in the multilingual process for negotiating EU law. When the preferred bidder is chosen, the terms of its bid can be ‘clarified and confirmed’, provided the bid is not altered substantially and competition is not distorted. Negotiation per se is not permitted. Translating these new rules into workable policy and practice presents a real challenge for the public sector and its legal team.

On 14 November, the Department of Health ended consultation on draft guidance to interpret and apply competitive dialogue in healthcare PFIs. The new rules are also being used to shape revised business case approval processes. When final, this guidance will be the first substantive indicator of UK Government policy and practice on competitive dialogue. In many respects, the new world resembles the old. But, significantly, the detail required at selection of preferred bidder (now the ‘selected bidder’) is new and seemingly enhanced. Precisely how much more detail remains to be seen, but it looks substantial, and for every additional layer of design, for each additional sub-contract to be drafted and for every additional issue that lenders must investigate, bid costs will rise (on both public and private sector sides).

And it is not just one bidding team doing this. Two or even three bidding teams will be developing designs, drafting contracts or negotiating finance that may never be used. Yes, the public sector needs certainty that the bid it selects can and will be delivered and represents best value. But there is a point where diminishing returns set in and where further parallel development adds nothing to competitive tension or the decision-making process. For many, current market practice represents this tipping point.

The PFI market recovers bid costs on the deals it wins. Government can increase the industry’s cost base, but ultimately will pick up the bill. At the same time, it adds to the volume of public and private sector resources applied in wasted effort. At best, this simply pushes up the overall cost of the PFI; at worst it risks alienating the better players who, in an increasingly global market, may chose to reallocate to more efficient markets. After all, spending its own money on itself, the private sector will not hang around to see it wasted. nAndrew Briggs is a partner at Lovells