Ensuring that PFI bid costs are kept to a minimum is an issue that has been around for some time. Whatever the size of project, bid cost risk can make projects unattractive for the private sector and unaffordable for the public sector.

Experience shows that the parties to a PFI project can struggle to partner effectively during the bidding period up to when contracts are signed.

The public sector paranoia over being held to ransom by the private sector and the private sector bullishness to achieve a good deal can strain negotiations in the key areas of legal documentation and design development. It is in these areas that we find bid cost spend the highest owing to the additional time it takes to resolve issues.

Contract standardisation should smooth the process. However, this has predictably evolved over the years, both through general guidance on all PFI projects (issued by the old Treasury Taskforce and more recently by the Office of Government Commerce advised by Partnerships UK) and also through various quasi-governmental bodies responsible for different PFI sectors e.g. NHS Private Finance Unit for the Health Sector, 4Ps for the Local Authority Sector etc.

The result has been a proliferation of standard form guidance across sectors in varying degrees of finality and this devalues the status of any such precedent – a situation which can be exploited in any non-partnering environment. There are also the project-specific issues which can never be subject to standardisation and just as much time can be spent arguing about these issues as used to be argued about issues which are now standard.

Deals have generally become more complicated. Two simple examples would be the incidence of bond as opposed to bank debt finance and the desire to unlock the value of land surplus to requirements on a particular project. Such complications slow the impact of any standardisation.

There have also been interesting developments in the past 12 months in the area of the bundling of smaller schemes. The NHS Lift Initiative, while not strictly PFI, creates public-private sector development companies to deal with the development and completion of projects over a period of time and this should help to reduce the marginal cost of smaller projects in the medium term.

Importantly, standard contract structures in PFI do not cover the bid phase. So, even assuming success with these standardisation initiatives, we must always continue to look at ways of enhancing a partnering atmosphere during the bid to financial close phase of a project in order to keep costs down.

Bid responsibilities and timetable

The project parties need to be open and realistic with each other about the responsibilities each owe to bring the project to a successful and timely conclusion. Key features would therefore be:

>A timetable which highlights the key inputs and responsibilities of all key parties to a project against a timeframe. The relevant parties therefore would be public sector client, SPV and key subcontractors.

In practice, the public sector will not be interested until appointment of preferred bidder, but there is nothing to stop the timetable applying before that to tie down key subcontract inputs on price, scope, design development and co-operation.

> Breach by a party of the timetable must result in real remedies. These incentives can be
whatever the project parties decide in the spirit of partnering, but typically:

i) breach by a subcontractor causing delay could extend the date to which their bid price is fixed;
ii) breach by SPV could lead to some limited sharing of financial model contingencies;
iii) breach by the public sector could link to an increase in price to reflect the reasonable cost of the delay – this encourages the public sector to create its own contingency to cover such a possibility – and why not?

In practice, the most difficult area concerns matters over which the parties have no control. These matters need to be recognised in the bid through the pricing of contingencies.

This approach is of real benefit to the project as a whole and a clear selling point to a potential public sector client. This is because the end result should be a process to financial close which is clearer, with clear roles and responsibilities following on from a more rigorous analysis of bid risk and the pricing of contingencies for it. It also sets the template during the bid phase for a partnering relationship which, after all, is to last for some 30 years.

PPC 2000

Trowers & Hamlins' successful project partnering contract, PPC 2000, incorporates the above partnering principles in relation to the bid phase of projects and has already been applied to new non-PFI projects worth more than £2bn.

The principles set out in PPC 2000 in relation to the bidding phase can easily be used in a PFI contract at any level. That is to say, if one or two of the project parties lack the appetite for entering into the pre-financial close structure, then the remaining project parties can still go ahead and do so. What this will mean is that there will be more matters relevant to the bidding process over which the partnering parties will feel they have no control, but these areas can at least be recognised.

If the lack of appetite is on the private sector side, it should be taken into account by the public sector evaluating bids on the basis of commitment to close on time. If the lack of appetite is on the public sector side, it should be an indication that the private sector should be making contingencies in its pricing for public sector delay.

PPC 2000 is specifically designed as being suitable for all projects and any procurement route. It is a recognition that project partnering involves the bringing together of a collaborative culture with a clear and robust procurement process for holding together the project team and integrating what they do and when they do it in order to achieve improved results.

Project team quality

The project parties should ensure that project teams for both public and private sectors have the right qualities to bring the project to close. This is a function of personality, experience, training and internal organisation. In particular, the project directors on both sides should be fully empowered by their respective organisations to make decisions on that project. If not fully empowered, then they should at least have the ability to facilitate a speedy resolution of internal positions.

On the public sector side, this means a project director having influence on key user groups. On the private sector side, this means the project director having real influence on key sub-contractors. These matters are fully tested using PPC 2000 principles. When investigating the integrity of a partnering timetable, parties are put to task as to whether they can deliver. If they cannot, it will become obvious. A partnering environment during the bid phase of a project needs to be supported by an appropriate contract structure at that time. PPC 2000 principles are able to assist.

John Holden-Ross is a partner at Trowers & Hamlins.