Understanding the Public Services Industy

Public Services Industry Review
4.54 The CBI conducted a survey of public procurement trends in 2007 55 and found an
overwhelming majority felt that bid costs on like for like contracts had risen over the
previous five years (52 per cent substantially, 36 per cent slightly) and that 84 per cent of
respondents considered that bid costs were having a detrimental effect on competition,
particularly through Small and Medium sized Enterprises (SME) participation. The
most significant reason for high bid costs was “inadequate specification” (62 per cent),
followed by the “absence of a standardised approach” (36 per cent).
4.55 Rising bid costs are not only a problem for bidders but also for government as:
•
the internal costs of managing bid processes increase;
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• contract prices rise as suppliers aim to recover bid costs ; and
•
higher costs of bidding lead to a reduction in the number of bidders. This could
lead to a less competitive outcome and higher costs for the project.
4.56 The last point is supported by a NAO report into PFI tendering 57 which found that 85
per cent of PFI projects included in their sample that closed prior to 2004 attracted
three or more developed bids compared to 67 per cent for more recently tendered
projects. One third of the projects included in their census, closing between April 2004
and May 2006 (with no differences between sectors), attracted only two bidders at
the point they were requested to submit detailed bids. However, recent experience in
programmes such as Building Schools for the Future (BSF) and primary healthcare
services 58 has demonstrated significant bidder interest. This suggests that bidder
interest may be higher in the early stages of a programme. As experience accumulates
and the forward pipeline is shorter bidder interest may wane, as picked up in the NAO
report. Commissioners will then need to be more active in promoting competition and
simplifying the procurement process.
4.57 A comparison of tendering costs between PSI markets and private markets is difficult
because of their different requirements. Perhaps the best comparison is for facilities
management and IT services. PSI providers of IT services estimate that their bid costs
for government contracts are often two to three times higher than for similar scope
contracts for private sector clients. A recent facilities management contract for a UK
Government department cost the successful PSI provider £350,000 in bid costs for an
annual contract value of £10 million. A very similar contract in size and scope for a
private sector client cost £180,000 to bid.
4.58 There may be a trade-off between maintaining competitive tension and the tendering
costs incurred. This trade-off is likely to vary across markets. In mature markets,
greater standardisation may allow for lower bidding costs, whereas less mature
markets are likely to require a more costly commissioning process.
56 To compound the importance of managing tendering costs, it is not only the tendering costs from successful contracts
that need to be recovered from those successful contracts, but, conceptually, also the costs of unsuccessful bids in a
sustainable market . So if the costs of bidding for a £250m PFI contract are around £5m, but the probability of winning for
any one company is only 20%, then for a sustainable market, each participant would be looking to recover not £5m, but
£25m if successful in winning the contract. In this simple example this represents 10% of the overall project cost.
57 Improving the PFI tendering process, NAO (2007).
58 Over 50 bidders expressed interest in the St Paul’s Way Medical Centre APMS tender, as reported in “Private Practice” in
the BMA, June 21 2008.
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