Too much of a good thing?

The government needs to get a grip on the way it awards PFI contracts or face a costly failure in its ambitious public spending plans, a PFI expert has warned.

Swamped by unprecedented demand for schools and hospitals and frustrated by inexperienced public clients, UK construction companies could be tempted to work in countries that do it better, says Tim Stone, chairman of KPMG's public-private partnership advisory services.

It's not the industry's capacity to build but its capacity to bid that is at issue. PFI deals are complex because successful bidders have to maintain facilities for decades. It takes experience to negotiate favourable terms because estimating whole-life costs of a building is a new science – or, some would say, a black art.

Breaking point
Stone believes the industry's capacity is already stretched, and public spending hasn't even peaked yet. Blair's public service ambitions require an extra £6bn each year. To put that into perspective, the most the NHS ever spent per year in its 56-year history was £1bn.

"All the good deal guys are working flat out," he says in an interview with CM.

Stone is calling on government to take a more coordinated approach, saying they should avoid flooding the market with simultaneous invitations to tender for PFI jobs across the sectors (schools, hospitals, roads and prisons), and also give longer warnings about projects in the pipeline so companies can marshal the resources to bid. Finally, he calls for a single government body to oversee the letting of public-private partnerships.

"I absolutely do not mean another government agency - just a few bods who know what's going on across the piece," he says.

The risk, Stone believes, is that PFI projects will fail to attract enough bidders to ensure valid competition, and that projects will fail to get off the ground. Other European countries such as Ireland, Spain, Portugal and Italy are beginning to adopt PFI techniques, he adds, so UK companies - who are, in his opinion, eight years ahead of the rest of the world in handling PFI - may be tempted to move there, especially if these countries handle the bidding process more efficiently. "All the good guys here will be asking themselves where they can best deploy their A-teams," he says.

Stone also has advice for contractors: take care to grow sufficient human capital within the company. "It's an apprenticeship," he points out. "You've got to work on deal after deal, and keep those skills in-house."

Stone raised eyebrows by airing his views in The Financial Times last month. He called for "a whole new cadre of individuals with the requisite procurement, programme and project management skills" and warned that this is "the fence at which the government's ambitions could fall".

Some in the industry accuse Stone of seeking controversy, but the Department of Health is clearly having trouble attracting bidders for hospital schemes. Building reported last month that the £340m Vanguard hospital project in Plymouth attracted so little interest that tendering is likely to be delayed until August, and that the DoH is asking American firm Kellog Brown & Root to take an interest in the UK healthcare market. Last October, Construction News reported that three hospitals worth a total of £1.4bn had been delayed because PFI policy makers in the DoH feared there would not be enough bidders.

Risky business
Wates' PFI director Lloyd Esau thinks Stone is right. In education, the sector he knows best, there is no standard approach to expressing specifications, so every project is unfamiliar territory. He offers a poignant example: an authority specifies that the company operating the school must ensure the safety of staff and pupils. It seems simple enough, but it can conceal vast responsibilies for things over which the contractor has limited control.

"You need people capable of picking this up and negotiating it away," Esau says. "People like that are expensive and thin on the ground."

Variations in output specifications can be tricky, admits Martin Lipson, director of schools and leisure at 4ps, the body that advises local authorities on procuring large projects. But he says it's unavoidable because each locality has its own insurance arrangements and risk profiles. He tries to get local authorities to standardise, but nationwide homogenisation would be impossible, and wrong. He says local authorities have come far because there is now a standard form of contract for PFI schools, unlike five years ago, although it tends to be tweaked from place to place.

Stuart Henderson, past president of the CIOB and, until recently, a PFI advisor specialising in education, also agrees with Stone. Bidders falling away, sparse turnout for the pre-qualification stage - these, he says, are more than just occasional occurrences.

But he believes government is getting better. He praises the Building Schools for the Future (BSF) initiative for forcing greater packaging of projects. (BSF is the way education projects will be procured in the future. See "New school terms", CM January 2004.) Wates' Esau calls BSF "extremely progressive" because it involves framework-style agreements. 4ps' Martin Lipson expresses reservations, though, because it's another new regime and that tends to confuse suppliers. "PFI in schools was just settling down," he said.

Bill Tallis, director of the Major Contractors Group, admits there's a shortage of bidding skills, and that bidding teams are less productive because the tendering process is about 50% longer in PFI, but he challenges the notion that fewer bidders necessarily equals weaker competition.

"It's easy to bid for dull commodity products, but for special and occasional products the situation changes," he says. "Look at Barts [the £1bn overhaul of St Bartholomew's and the Royal London hospitals]. The market would not be working properly if 50 companies were able to bid for that."

Tallis maintains that the government is in fact getting more efficient at bringing projects to market, partly as a result of working with the MCG. Batching hospitals is one example, as is reducing the number of shortlisted bidders.

But there's some distance still to go. "No civil servant ever got sacked for delaying a decision," he says. And he doesn't hold out much hope for the kind of coordination KPMG's Stone suggested. "Ministers love announcing new schools and hospitals. Can you imagine them giving up their control over timing?"

Ian Rylatt agrees. He is managing director of Balfour Beatty Capital Projects, the major contractor's bidding organisation. He says that Tim Stone's comments represent the kind of extreme view that PFI tends to elicit. Good deal-makers do come at a premium, he agrees, but while schools and hospitals are booming, there's far less activity in areas such as roads, rail and infrastructure, allowing Balfour Beatty, for one, to shift people from these sectors to where they are needed.

Rylatt regards Stone's recommendations as unrealistic. "Sure, we'd love a steady flow of projects so we could establish an efficient bidding machine, but whose interests would that serve? Contractors', or the public's?

"Ministers have their particular concerns," he concludes. "We need to be able to react to the market in an adult and mature way. We can't expect to be spoon-fed."