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NAO publishes report on benchmarking and market testing

On 6 June 2007, the National Audit Office published its report entitled “Benchmarking and market testing the ongoing services component of PFI projects”.

The National Audit Office "examined early examples of the public sector using contractual processes to benchmark* and market test* the value of these services. It found that value for money had been achieved through the value testing process in about half of the cases. In other cases including some where the private sector negotiated price increases during these processes, the information available suggested it was uncertain whether value for money was likely to have been achieved through the value testing process.

The report details lessons that have been learned in these early examples where services such as catering and cleaning were value-tested, and states that there is now new detailed Treasury guidance which public officials can call on when using these processes. Facilities services account for a substantial part of a PFI contract and, with increasing numbers of projects about to use value-testing, typically after five years of a PFI contract being in operation, the NAO has highlighted issues which officials need to keep in mind when using these processes.

In examining the first nine projects to have completed value testing the NAO found that value for money was demonstrated in five cases. Two telecommunications projects achieved good value for money with decreased prices of 19 and 37 per cent. In three building projects, good value for money was achieved. Building sector prices changed mainly by between -2 to +6 per cent after public officials negotiated these down from a substantially wider range of opening proposals for price changes. In four building projects where prices increased the NAO assessed value for money arising from the value testing process as uncertain – three being hospital projects and one a schools project.**

Whilst the final price increases were fairly modest, they were in addition to the annual contractual price increase for inflation, and in some cases were achieved by projects agreeing to minor service reductions, where projects considered services to have been over specified previously. The projects did not expect the service to users to be compromised.

The report sets out a legal opinion that, in a sample of early contracts, clauses dealing with market testing and benchmarking were often not well drafted which limited their expected effectiveness, although the parties may still be able to conduct effective value-testing procedures.

The NAO agrees with the Treasury that the competitive element of market testing, if it can be applied successfully, will generally be the mechanism likely to give the best value for money when value testing facilities services. In the three market-tests carried out to date – all of them in hospitals – there were bids by competing providers. However, the present supplier won two deals and in the other project services were brought back in house. The report concludes that for market testing to work effectively in the future there should be strong competition with external suppliers.

Sir John Bourn, head of the NAO, said today:

“It is important that public officials test the cost and quality of facilities services to get value for money during the life of a PFI contract. My report highlights lessons in how value-testing should be carried out. In particular, public officials must have the necessary skills, must promote vigorous competition when value testing, and they must have a full understanding of whether and how the private sector’s price and service proposals offer value for money.”

The report recommends that the recent Treasury guidance be taken up by departments and that the Treasury should continue liaising with departments to identify suitable cost data to use in benchmarking. The NAO also urges that further steps should be taken to compare the cost and quality of facilities services under the PFI with conventional outsourcing experience.

*Benchmarking is the process by which the project company contractor compares either its own costs or the costs of its subcontractors against the market price of equivalent services

Market Testing means the re-tendering by the project company of the relevant service so that the Authority can test the value for money of that service in the market

** Sussex Partnership NHS Trust, University Hospital of North Durham, Queen Elizabeth Hospital Greenwich and Debden Park High School."

Click here for a copy of the report.