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ppp Thursday, 6 September, 2001, 08:17 GMT 09:17 UK
How private bids work
Files
PFI/PPP contracts can run to 800 pages
Critics of PPP and PFI projects often argue they are over complex, and that the contracts which underpin them only benefit lawyers.

However, Rhona Harper, a partner in legal firm Shepherd and Wedderburn, which deals extensively in PFI/PPP work, disagrees.

She told BBC News Online Scotland that most PFI/PPP work is done on a fixed fee basis now and that that means clients - most usually local authorities - get value for money.

Ms Harper said that there is a gradual move towards standardisation of some contracts, but that they must remain comprehensive to enshrine the desired outcome of the project.

Here BBC News Online Scotland guides you through some of the steps involved in putting a PFI/PPP project in place.


Outline business case

The first step in a PPP is to prepare what is known as the outline business case (OBC) - this is effectively a business plan which should make the scope and viability of the project clear. The completed OBC must be submitted to the Scottish Executive for approval.

Next the procuring authority should prepare its "output specification" - this identifies the "outputs" the project must deliver.

The production of an output specification is one of the main differences from the traditional procurement process.

Rhona Harper
Rhona Harper is a PFI/PPP lawyer

For example, in a traditional schools procurement an "input" approach is taken - the authority would specify the number and size of classrooms, the size of the dining area and games hall.

Under the PPP route the specification is "output" based - the authority will specify the level of service it wants delivered and leave the private sector to decide on the best way to deliver that particular service.

The end result differs from a traditional procurement also in that the authority will not simply be handed a completed building; they will also receive support services such as cleaning, catering and maintenance over the life of the project (usually 20 to 30 years).

The aim of this approach is to allow the private sector to bring a level of innovation to the delivery of the services.

There is also an element of risk transference to the private sector.

The output specification is the document on which the private sector will base its tender but is also the basis for the technical specification in the final contract document.

Public sector comparator

The OBC will contain a draft public sector comparator (PSC). It is a fully costed project of the same scope as the proposed PPP which tests whether an affordable alternative exists using traditional procurement.

The PSC is used as a benchmark against which the value for money of the private sector bids will be judged.

The pre-tender stage

Once the executive approves the OBC the next stage is to develop the invitation to tender/negotiate (ITN) and the draft contract.

The ITN sets out procuring authority's objectives for the PPP, the rules for the bid process, legal and financial information and the authority's evaluation methods - this effectively brings together all of the authority's preparatory work.

Risk

One of the ideas behind PPP is the transference of project risk to the private sector. The risk will be assessed during the ITN - the type of risks include design risk, price risk and financing risk.

For example, in the case of price risk the parties negotiate a fixed price for construction of the particular asset - say a hospital.

If during construction the cost of building that hospital increases, under a traditional procurement route, any extra cost would be passed on to the authority. Under PPP the private sector has to meet these costs.

The allocation of risk is not as complex as it sounds because of the number of PFI/PPP projects completed in Scotland and the experience which has been in this field.

Procuring authorities will pay a premium to the private sector for the transference of risk and this is factored into the payments made over the project's lifetime.

Value for money

Value for money is a sensitive issue and one which is considered at what is known as the pre-tender preparation stage. The executive has asked a Scottish Parliament committee to assess whether PPP offers good value.

The procuring authority must demonstrate that the project offers value when compared against the public sector comparator.

Pre-qualification of bidders

Once the authority is happy with its ITN and the scope of the project, it will invite expressions of interest from the private sector by issuing a pre-qualification document.

This is essentially the first hurdle for private sector bidders.

Bidders are invited to submit information about themselves - usually in response to a questionnaire or prescribed form.

The authority will evaluate the response with a view to issuing the ITN to the bidders it wishes to take forward to the tender stage.

The tendering stage

The issue of the ITN to bidders is the start of the competition phase - a copy will be sent to each bidder who will analyse the information with the view to submitting a tender.

Prior to tenders being submitted bidders will have the opportunity to meet with the authority to discuss the project and ask questions.

Office worker
External advisers will help public authorities

There must be open competition during the bid process and the procuring authority must comply with EU regulations which require bidders to be treated equally and fairly.

Bidders will submit fully priced bids which will contain details of their technical solution, their acceptance, or otherwise of the authority's proposed allocation on risk and their proposed funding structures together with their financial and legal submissions.

The bids will then be evaluated by the authority and their external advisers.

The authority will select their preferred bidder on the basis of the most economically advantageous proposal.

The authority must also be satisfied that the preferred bidder is affordable and capable of delivering their proposed solution.

The authority will then enter into negotiations with the preferred bidder to finalise their technical solution and work towards signing a contract.

Final contract terms

The negotiations of PPP projects have a reputation for being unnecessarily drawn out.

The key is for the authority and the private sector to understand where the other is coming from and find a solution that is mutually advantageous.

This does take time but as the market for PPP in Scotland matures "market positions" have been established on various issues which help speed up the negotiation process and shorten the time between the appointment of a preferred bidder and contract close.

The time scale from the appointment of preferred bidder to contract close can be anything from six months to well over a year depending on the complexity of the project.

The final contract is a lengthy document which can be upwards of 800 pages long.

In addition to the final contract there are about 50 further funding documents, sub-contracts and other documents which have to be negotiated and agreed.


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