CABINET MEETING – 11th APRIL 2000

EXECUTIVE SUMMARY SHEET – PART II

Not for publication as the report contains exempt information relating to the financial or business affairs of particular persons (Local Government Act 1972, Schedule 12A, Part I, Paragraph 7)

Title of Report:

Sandhill View PFI Project

Author(s):

City Treasurer, Director of Education and Community Services, and Director of Contracting Services

Purpose of Report:

To advise Members of the evaluation of bid proposals for the Sandhill View project and to recommend a Preferred Bidder

Action Required:

Members are requested to note the report on the selection of a Preferred Bidder for the Sandhill View project. A recommendation will be tabled at the meeting. Not for publication as the report contains exempt information relating to the financial or business affairs of particular persons (Local Government Act 1972, Schedule 12A, Part I, Paragraph 7)

Cabinet – 11th April 2001

Sandhill View PFI Project

Report of City Treasurer, Director of Education and Community Services, and Director of Contracting Services

1. Purpose of the Report

1.1 To advise Members of the evaluation of bid proposals for the Sandhill View PFI project and to recommend a Preferred Bidder.

2. Background

2.1 Members will recall that following the approval by DfEE and DETR of the Outline Business Case for the Sandhill View project that an Invitation to Negotiate (ITN) was issued on 9th October 2000 to four organisations to design, build, finance and operate a range of facilities and services at the proposed new Centre. Bids were invited by 18th December 2000.

2.2 All four organisations returned their bids by the due date. Bidders presented their proposals to an invited audience of service Cabinet portfolio holders, Ward Members, Sandhill View school governors, officers and external advisers on 21st December 2000. An intensive period of bid evaluation by Council officers and external advisers then followed.

2.3 The initial evaluation was completed by the end of January 2001. At this point, a fourth volume of the ITN was issued. This supplementary volume highlighted to each of the bidders, areas of their individual proposals that did not meet the requirements of the output specification in the ITN. In addition, bidders were invited to respond to a revised payment mechanism and project agreement. Revised bids were invited by 9th March 2001. All four bidders returned revised bids by the due deadline.

3. Evaluation of Revised Bids

3.1 All four revised bids have been evaluated by Council officers and external advisers. The criteria for evaluation were set out in detail in Volume 1 of the ITN and covered the following main areas: - technical, operational and organisational - commercial and contractual - financial

The bids were scored using an evaluation matrix based on the detailed criteria in the ITN. The purpose of the matrix was to give an objective assessment of the quality of the bids. 3.2 The results of the evaluation scoring were as follows:

Bidder A Bidder B Bidder C Bidder D Technical, Operational 67.69 67.85 64.62 61.79 and Organisational Evaluation Commercial and 75.00 67.50 55.00 45.00 Contractual Evaluation Financial Evaluation 74.75 72.75 67.63 63.13 Total Score (Max. 300) 217.44 208.10 187.25 169.92

Bidders A and B received the highest scores in the evaluation.

An Executive Summary of the Council’s external advisers reports on the evaluation are included in Appendices A, B and C.

3.3 In addition to the qualitative evaluation, further financial evaluation has been undertaken of the capital cost, lifecycle costs and running costs of the revised bids, and the resulting Unitary Payment, to assess affordability and value for money.

3.4 Cabinet on 24th May 2000 approved a report that gave approval for annual budget provision to be made from 2002/03 of £492k, to meet the net funding requirement of the project. This provides a key benchmark for assessing the affordability of the four bids. The results of the financial analysis show the following:

Bidder A Bidder B Bidder C Bidder D Annual budget £000 £000 £000 £000 requirement 470 490 673 1,090

The submissions made by bidders A and B are within the affordability provision approved by Cabinet in May 2000.

It should be noted that the above figures do not include the cost of sports management. The cost of this service was also not reflected in the budget provision figure of £492k. The report to Cabinet in May 2000 separately identified the cost of sports management as £90k per annum.

3.5 On the basis of the foregoing, bidders C and D were advised that they were unsuccessful in their bid for the Sandhill View contract. Negotiations are ongoing with bidders A and B. 4. Next Steps

4.1 It is important to take the fullest advantage of the competitive element of the procurement process before Preferred Bidder is announced. To this end, negotiations will continue with bidders A and B from the time of writing this report until the meeting of Cabinet, to secure agreement or an agreed understanding on key commercial and contractual terms. Much progress has already been made in this regard. For example, a full mark up and commentary has been received from bidders A and B on the Project Agreement. Similarly, a mark up has been given on the proposed payment mechanism.

4.2 A series of issues papers have been forwarded to bidders A and B on technical/operational and commercial/contractual matters. Meetings have been arranged to discuss these as follows: - bidder A : Tuesday 3rd April - bidder B : Wednesday 4th April

An exchange of correspondence will follow from the meetings to record joint understanding between the Council and each individual bidder. This will underpin the decision by Cabinet on Preferred Bidder.

4.3 A recommendation on Preferred Bidder will be tabled at the meeting.

4.4 Detailed negotiations will continue after the Cabinet meeting with the Preferred Bidder to secure financial close. A further report to Cabinet on financial close will be produced for the July 2001 meeting.

4.5 A site start on the works will commence in July 2001, with completion of the school anticipated for August 2002.

5. Conclusions

5.1 Members are requested to note the progress on the selection of a Preferred Bidder for the Sandhill View project. A recommendation will be tabled at the meeting Appendix A

Technical and Operational Report

Executive Summary

1. Background

A review and evaluation has been carried out on the four bids received by the City of Sunderland on the 18th December 2000 and also of the four revised bids received on the 9th March 2001 submitted in connection with the City Learning Centre at Sandhill View. The review has covered the technical, operational and organisational aspects of the bids. Commercial, financial and legal reviews are covered in separate documentation.

The bidders proposals were submitted by the following consortia who were short listed by the City of Sunderland in October 2000 and subsequently invited to negotiate in accordance with the ITN documentation issued on the 9th October 2000.

 Education Solutions  Jarvis  Kajima  Lochindaal (King Sturge)

2. Submitted bid data

The table below sets out the key data based on the revised bids received on the 9 March 2001:-

Bidder Area Cap.cost £ Life cycle costs Operating costs Programme (5) (Sq.m) (2) (25 yrs.) £ (3) (25 yrs.) £ (4) (1) This This information This information Start. July 2001 Bidder A 15183 information is is exempt from is exempt from School. Aug. 2002 exempt from release. release. End. Feb. 2003 release. Start. July 2001 Bidder B 15504 18,494,202 4,050,000 14,538,000 School Aug.2002 End Feb. 2003

Start. Oct .2001 Bidder C 14700 16,920,713 4,126,560 17,532,025 School. May. 2003 End July 2003

Start. July 2001 Bidder D 15366 18,759,978 3,786,364 19,341,050 School May 2002 End Jan. 2003

(1) The area is gross internal (measured to inside of external walls) (2) Capital costs include for construction, fees, furniture and equipment, external works, landscaping, highways works, contingencies and design risk (3) Life cycle costs are the total expenditure over the 25 year operating period and cover planned building maintenance (4) Operating costs reflect costs incurred through catering provision, security, cleaning grounds maintenance etc. (5) The programme dates are given as the start of construction on site, the completion of the school and the end date is the completion of the construction contract.

3. Commentary on submitted proposals

Compliance with ITN

All the four bidders have achieved broad compliance with the requirements of the ITN, and the subsequent clarification notes issued by the Council; with the exception of Bidder C whose completion date for the school and associated facilities is later than the stipulated date of August 2002. There remains a requirement to ensure that the areas proposed by the bidders meet the requirements of the User Groups and to review some internal reconfiguration of the spaces to improve User Group operational needs. It is considered that these fine tuning issues can be dealt with satisfactorily within the overall framework of the submitted proposals without significant additions to the costs or programme.

User Group responses

Some observations have been received from the User Groups on the revised bids. However some of these comments are unclear others can be satisfactorily resolved as part of ongoing negotiations with bidders as they involve fine tuning of internal layouts etc. Overall the provision of facilities for the school are considered to be in line with the User requirements. The other key User Groups, namely the Library/ESS/Ed.Services/School Library Services need to be satisfied that the area and configuration meets their operational requirements.

Robustness of costs

An analysis of the bid capital, life cycle and operating costs has been carried out and the figures included in the revised bids are broadly inline with the ITN projections. The disparity of the amounts included in each bid for life cycle and operating costs reflect the bidders assessment of quality of building maintenance and level of operating services (Cleaning/security/catering etc.). The construction costs vary again in line with the bidders design solution and the view taken on design risk. The rates per sq.m. submitted by the bidders, from £1.077.99p to £1,220.88p, is appropriate to the market place and relates to the ITN rate of £1,140.35p.

Quality of design and flexibility of layout

All the four design solutions have been generated using experienced architects and their interpretation of the ITN Output Specification requirements. Bidder A have produced a much improved scheme as part of their revised bid and the building configuration and appearance fits well into the site. Bidder B’s design is probably the most ‘architecturally’ striking in appearance and delivers a very workable layout which is able to adapt to change. The scheme submitted by Bidder C is configured around an ‘internal street’ from which gives access to the various User Group areas. The concept appears to work well but the layout could prove to be less flexible should the City require additional facilities. The Bidder D proposal is also centred on a ‘street’ design concept and on which allows for greater flexibility.

All four proposals are configured on the Sandhill View site in such a manner that the existing school can operate until the new school facilities are ready for occupation; thus providing a single decant arrangement prior to the demolition of the existing school premises.

Town planning/Highway issues

Outline planning consent for the development has been granted by the City of Sunderland (Ref; 99/01797/LOU). An initial review of the project designs by the Environmental Department has established that there are unlikely to be any fundamental problems associated with the proposals, subject to additional information to be supplied by the preferred bidder at the appropriate time. Two of the bidders (Bidder A and Bidder B) have a preferred location of a new access into the site from Grindon Lane, which is not in accordance with the outline consent. These two bidders will need to discuss this issue further with the City Highway Engineers as any variance to the location of the access will involve a new planning application and public consultation; all of which will take a further 16 weeks with no guarantee of success. The bidders have however included in their costs for the compliant access via a new roundabout.

Programme

The project programme within the ITN provides for the preferred bidder to be selected on the 11 April with final negotiations resulting in Financial Close by July 2001. Three of the bidders (Bidder A, Bidder B and Bidder D) propose to start work on site (construction) in July 2001 with completion of the school and associated facilities by August 2002. Bidder C have submitted a programme which provides for Financial Close in October 2001 and a start on site in October 2001, the school and associated facilities being completed by May 2003. This programme is non-compliant and will cause the school considerable difficulty and extra expense with relocation moves within the academic year.

Facility management

Three of the four bidders (Bidder B/Bidder C/Bidder D) have elected to include within their consortium facilities management organisations and with whom they have worked up their submission proposals. Bidder A have submitted proposals which have been generated by their ‘in house’ facility management group. The scope of the proposals cover the following aspects.

 Building maintenance (day to day as well as planned)  Energy and utility services  Security  Cleaning  Catering  Furniture, fixing and equipment  ICT  Site and grounds maintenance  Centre ‘help’ desk  Management of the Sports Hall/swimming pool facilities

The proposals submitted by Bidder C and Bidder A are comprehensive and permit quite detailed scrutiny. The proposals submitted by Bidder B and Bidder D require further analysis and review to ensure adequacy of level of service provision. Particular attention needs to be given to the adequate and full provision of furniture and fittings.

Two of the bidders (Bidder A and Bidder B) have offered opportunity for third party income. The level of facility management services offered by these two consortium reflect the additional use of the City Learning Centre. Bidder C and Bidder D have not offered any third party revenues.

Management and resources

All the four consortium short listed to bid in October 2001 were assessed amongst other key criteria on their quality of management and their ability, through previous schemes to adequately resource and deliver and operate the City Learning Centre over the 25 year concession period. The review of the bids made in December 2000 confirms that all the bidders have adequate depth of resources to design, build, operate and fund the project. Each of the consortia also have a proven track record from previously awarded projects of a similar nature to demonstrate that the service element of the contract will be well managed. It should be noted however that the PFI process is one of partnership and that the interface between the City of Sunderland members and officers and the personnel assembled by the consortia will be crucial in the successfully delivery and operation of the City Learning Centre. The ITN provides for the direct interview of key staff put forward by the preferred bidder so that the quality if interface is ensured.

4. Summary conclusions

The four bids received each deliver technically competently designed and affordable schemes.

User Groups must be fully satisfied that the configuration of their facilities is appropriate for their needs and the synergy and efficiencies built into the ITN requirements and has been interpreted correctly. Three of the bidders can deliver the new City Learning Centre to the agreed programme and without major disruption to the day to day operation of the Sandhill View School.

Detailed resolution only of town planning and highway matters is required.

Level of facility management services to have final review for acceptability and affordability

Consortium resources and management is appropriate for the project.. Interview of personnel to be part of the latter negotiating stage following preferred bidder appointment.

The evaluation scores for the technical, operational and organisation aspects of the four bids is set out in the table below. A full evaluation table is included in Appendix 5. The scores below should be added the evaluation scores for the commercial and legal elements of the bids and the total score (max 100) provides the preferred order of the four bids.

Bidder A Bidder B Bidder C Bidder D

Total weighted scores (max 67.69 67.85 64.62 61.79 100) Appendix B

Financial Evaluation Report

Executive Summary

Key Points 1.1 The financial evaluation undertaken has been based upon the bid submissions responses (‘bids’) received on 18 December 2000 from bidders to the ITN issued by City of Sunderland Council (“the Authority”) on 9 October 2000, subsequent clarification responses and a further submission of updated proposals on 9 March 2001 following the issue of updated requirements from bidders (ITN Volume 4) on 1 February 2001.

1.2 From our review of the bidders responses, we conclude that the Bidder A bid has the lowest financial cost to the Authority, measured in NPV terms. The Bidder D bid is significantly more costly than the three other bidders.

1.3 With the exception of Bidder D, the price of which is materially higher than the other three bids, there is little significant difference between bidders in terms of NPV analysis and affordability. However, the Authority will note that changes in bidders’ pricing assumptions and risk transfer positions in relation to, inter alia, the following factors could create a different ranking:

 Utilities

 Land proceeds

 3rd party revenue assumptions

 Payment Mechanism

1.4 These items are explained in more detail later in the report.

1.5 The price may also vary according to changes identified by the technical evaluation. In particular, it is noted that the Bidder C bid does not deliver the centre in accordance with the prescribed timetable and the different assumed contract period has an impact on NPV analysis (as described below).

1.6 It will be noted that the Bidder B bid submitted two funding solutions to its standard bid: a debt financed option and a bond financed option. A greater discussion of these alternative options is provided in Section 4. It should, however, be noted that we are unaware of any comparative schemes which have achieved financial close using bond-provided finance and we would be hesitant in confirming the deliverability of such a funding proposal within the prescribed timetable.

1.7 The NPV analysis on both options is similar and is detailed in the Affordability Table below. The Authority will note that the marginal saving on the bond financed route is partially offset by the greater inflation risk transferred to the Authority involved with the provision of an index-linked bond financing. The sinking fund contribution if RPI is assumed to increase from 2.5% to 3% would be £576,000 under the bank financed bid but £605,000 under the bond financed bid and there is practically very little difference in the affordability to the Authority of either funding solution.

1.8 We have therefore evaluated the Bidder B bid on the basis that either funding solution may be carried forward without substantially impacting on the overall price. Where the Unitary Payment is identified throughout this report, it relates to the bank funded option.

1.9 In terms of qualitative analysis of the deliverability, financial strength and robustness of submissions, all 4 bids were found to be of an acceptable standard, as indicated in the scoring matrix detailed in Appendix A. Bidder A had the highest scoring bids, followed by the Bidder B, Bidder C and Bidder D bids respectively.

1.10 It should be noted that in response to the ITN Risk Matrix and Payment Mechanism, all bidders indicated areas of non-compliance and in order to retain maximum negotiating leverage, it would appear prudent for the Authority to address these issues prior to the appointment of preferred bidder. In particular, it is noted that certain ambiguities remain in respect of Bidder A’s and Bidder B’s comments on the Payment Mechanism, whilst Bidder C’s and Bidder D’s proposed amendments, are unlikely to be acceptable to the Authority.

Key Financial Indicators

1.11 A summary of the key financial evaluation information from the proposals in the standard bids is set out in the tables below, followed by explanatory footnotes.

Unitary Payment NPV

Standard bid Bidder A Bidder B Bidder B Bidder C Bidder D £’000 (debt) (bond) £’000 £’000 £’000 £’000

NPV of Unitary Payments with 25,071 25,534 25,210 25,505 32,884 standard Rates(1)(2)

Ranking 1 4 2 3 5

1.12 Bidder C has a theoretical advantage in the way the discounting works: Bidder C’s operating period commences almost a year after the other bids, while all bids are discounted to the same date (July 2001). To offset this effect, the following table shows the NPVs of all bids over 26 years, including one year of the Authority’s own operation of the school (in Bidder C’s case this would be year 1 and in the other bidders, year 26). Standard bid Bidder A Bidder B Bidder B Bidder C Bidder D £’000 (debt) (bond) £’000 £’000 £’000 £’000

NPV of Unitary Payments with 25,176 25,639 25,315 25,957 32,990 standard Rates(1)(2)

Ranking 1 3 2 4 5

1.13 At Outline Business Case, the Authority’s Members resolved to support an annual contribution of £492,000 above the current baseline of expenditure. This should be compared with the net sinking fund contribution shown in the following table: Affordability

Standard bid Bidder A Bidder B Bidder B Bidder C Bidder D £’000 (debt) (bond) £’000 £’000 £’000 £’000 2002/03 2002/03 2002/03 2003/04 2002/03

First full year Unitary Payment 2,298 2,360 2,185 2,414 3,227 (nominal)(2) (3)(4)

Ranking 2 3 1 4 5

First full year RSG revenue support(5) 2,102 2,102 2,102 2,102 2,102 Cash releasing saving from 534 534 534 547 534 Authority’s budget in 1st year Net charge (saving) to Authority in the (337) (274) (451) (235) 592 first full year

Rate of annual indexation of 1.9% 1.7% 2.5% 2.5% 1.0% Unitary Payments assuming RPI is 2.5%

NPV of net charge to the Authority 4,874 5,337 5,013 6,776 12,688 (after RSG and savings) (6)

Simple average net charge to the 195 197 184 271 508 Authority(7)

Annual Authority contribution to 470 499 490 673 1,090 deficit sinking fund(8)

Ranking 1 3 2 4 5

Notes: (1) Net present values have been calculated to 1 July 2001 on a consistent basis by PwC, and may differ from NPVs stated in bids due to variations in discount rates and time periods used by bidders. (2) The bids have been standardised for Rates (using a Rates figure of £150,000 based on the Authority’s independent estimate), but include their divergent estimates of the capital receipt (3) The first year Unitary Payments are actual nominal prices in the year paid and may differ from prices stated in bids where the latter have been deflated to 1 July 2001. (4) The first full year begins on 1 October 2002 for 3 of the bidders and 1 August 2003 for Bidder C. (5) It is assumed that will be no material difference in first year revenue support even if the operating commencement date varies. For the Bidder C bid, there is a possibility of negotiating with the DfEE for additional year’s Credit uplift, but it has been prudent to leave this out at this stage (6) The net charge to The Authority is stated at 1 July 2001 prices and is calculated based on the Unitary Payment (UP) compared with anticipated RSG support and savings. (7) The simple average is the UP less RSG and savings divided by 25 years. (8) The sinking fund provides flat annual Authority contribution which pays for the overall project net deficit of UP less RSG and savings. It is stated in July 2001 terms, subject to RPI, and with interest of 6% on any surpluses. Summary Bid Cost Reconciliation

NPV values for all Project Costs Bidder A Bidder B Bidder C* Bidder D and Income Discounted at 8.65% NPV £’000 NPV £’000 NPV £’000 NPV £’000 COSTS Total capital (exc rolled up This 18,416 16,190 19,726 interest/commitment fees) information is exempt from release. Lifecycle expenditure This 1,814 1,474 2,168 information is exempt from release. Direct costs – operating costs (inc This 10,436 7,785 11,248 Rates adjustment) information is exempt from release. Senior Debt and bridging debt net This (845) (1,114) (1,786) cost/(saving) information is exempt from release. Subordinated Debt net cost This 163 611 139 information is exempt from release. Taxation expense This 791 1,264 2,264 information is exempt from release. Equity net cost/(saving) This (500) 666 1,384 information is exempt from release. Other costs and cost of timing This 948 2,210 1,520 differences, eg. DSRA & MRA information is exempt from release. Gross cost of project This 31,223 29,086* 36,662 information is exempt from release. INCOME Cash interest This 1,037 23 347 information is exempt from release. Land sale value This 3,465 3,558 3,431 information is exempt from release. Third party income This 1,187 0 0 information is exempt from release. Unitary Payments 25,071 25,534 25,505 32,884 Total Income This 31,223 29,086* 36,662 information is exempt from release.

* Bidder C’s NPV is lower because the operating period commences almost a year after the other bids, while all bids are discounted to the same date (July 2001), resulting in a theoretical cost advantage of delayed payment for the Authority.

Funding and financial strength

1.14 The financial evaluation team has scored each of the funding components of the financial submissions and the summary table is given below. Full scoring tables are included in Appendix A.

Bidder A Bidder B Bidder C Bidder D Item Weight Score Wtd Score Wtd Score Wtd Score Wtd Score Score Score Score Deliverability of 43 58.5 122 59 127 55 118.5 53 113.5 Finance Plans Financial Strength 43 28 131 24.75 118 24.75 106 23.5 97

Robustness of 14 6.5 46 6.5 46 6.5 46 6 42 Projections Overall total 100 299 291 270.5 252.5 Weighted average 74.75% 72.75% 67.63% 63.13% Appendix C

Legal/Commercial Evaluation Report

Executive Summary

1. Approach to Legal/Commercial Evaluation and Methodology

The Project Team decided that commercial and contractual issues should be evaluated together and that the commercial/contractual component of the evaluation should constitute a third of the total marks available, with the financial component and the technical/operational/organisational component respectively representing also a third of the total evaluation marks available.

Commercial and contractual evaluation was undertaken by Eversheds and PriceWaterhouse Coopers (external legal advisers and external financial advisers respectively to the Council). Within the overall component of commercial and contractual issues, four distinct evaluation areas were identified. A total of 100 marks was to be allocated to the commercial/contractual component in total and the decision was made to allocate these marks in proportion to what was perceived to be the relative importance of the four identified evaluation areas.

The areas and points allocations were as follows:-

EVALUATION AREA SCORED OUT OF STRENGTH OF BIDDER  Inherent strengths  Parent company guarantees  Performance bonds  Internal risk management arrangements 20 CONTRACT CONDITIONS  Extent to which the Bidder will accept the conditions set out in the draft Project Agreement  Extent to which the Bidder has demonstrated the support of the funder(s) to its position on contract conditions  Extent to which the Bidder has demonstrated the support of all members of the proposed consortium to its position on contract conditions 70 RISK ALLOCATION AND MANAGEMENT EVALUATION AREA SCORED OUT OF

 Extent to which the Bidder will accept the risk allocation proposals set out in the ITN  Quality of the Bidders’ proposals in respect of the management of risk to be borne by the PSP 5 TRANSFER OF WORKFORCE  Quality of the Bidder’s proposals in respect of the terms on which employees will transfer, and the period for which the terms will be guaranteed  Quality of Bidder’s proposals in respect of pensions provisions  Quality of the Bidder’s proposals in respect of the management of consultations with transferring employees and the process of transfer 5 TOTAL 100

2. GENERAL COMMENTS ON THE BIDS

A clear distinction was apparent between Bidder A and Bidder B on the one hand and Bidder C and Bidder D on the other. Whereas Bidder A and Bidder B provided full mark-ups and commentaries upon the Project Agreement (in other words they provided relatively detailed drafting and/or analysis of the legal positions represented in the draft Project Agreement), Bidder C and Bidder D provided relatively little by way of detailed drafting commentary.

One of the principal difficulties in evaluating the legal submissions of bidders under PFI contracts flows from the fact that there is now a high degree of contract standardisation in the sector which has the advantage of allowing a Council to issue a relatively detailed contract document which is based largely upon central government recommended documentation. Some bidders however, asked to provide a full commentary upon such standardised documents, have adopted the approach of largely approving the documentation without any detailed commentary in the apparent hope and expectation that this approach might actually allow key commercial and legal differences between themselves and the Council to be concealed until the preferred bidder stage (if they attain that stage) at which stage the issues can be negotiated from a position of strength (from the Contractor’s point of view) with the competitive element provided by the existence of other bidders having then been removed. Accordingly, a well advised Council has to strike a careful balance in evaluating returned bids between those bidders who choose to give a full mark-up and commentary (thereby inevitably exposing themselves to the risk of being scored down because of the confirmation of differences of position between their own preferred commercial/legal position and that preferred by the Council on any particular issue) and those bidders who whilst largely approving the documentation provide very little by way of commentary or detail upon which to allow any meaningful analysis of their legal/contractual position.

In general, and following lengthy legal and financial clarification meetings with all bidders, the commercial and contractual evaluation team were not satisfied that the approach adopted by Bidder C and Bidder D did in fact evidence wholesale agreement with the Council’s preferred contractual/commercial positions as set out in the draft Project Agreement. There were a relatively large number of areas in which both of these bidders appeared to be hedging their position until post Preferred Bidder appointment by giving general assurances as to their acceptance of Treasury Taskforce (“TTF”) standardised positions while refusing to be drawn or committed to specific drafting or commercial commitments. In contract, both Bidder A and Bidder B gave relatively clear expositions of their positions on key commercial and contractual issues and it was possible to explore and identify these further at legal and financial clarification meetings. Accordingly, Bidder B and Bidder A scored relatively better than Bidder C and Bidder D notwithstanding the fact that in terms of apparent differences between the Council’s drafting and that of the Bidders, Bidder A and Bidder B raised more issues or were more likely to vary from the Council’s preferred position.

3. DEALING WITH THE BIDDERS IN TURN

(a) Bidder A

Overall a strong commercial/contractual bid predicated on an extremely full mark-up and legal commentary of the principal Project Agreement.

Dealing with the component evaluation criteria in turn:

 Strength of bidder

Bidder A scored relatively well under this limb for two principal reasons. Firstly, the Bidder A parent company will effectively “own” the specially formed company which will actually run the Project. In addition the Bidder A parent company will offer full parent company guarantees to both Bidder A Construction (who will undertake the build phase) and Bidder A FM (who are under an obligation to run the site for 25 years). The overall effect is to have an operation which is primarily within the control of Bidder A and the Bidder A Group of companies which brings clear potential benefits to the Council in terms of lines of communication, reliability and enforceability of obligations and robustness of the bid as a whole.  Contract conditions

The commercial positions taken in the mark-up and commentary provided by Bidder A and in the legal and financial clarification meetings undertaken, revealed Bidder A to be a sophisticated operator with an extremely good knowledge of the schools PFI market. In terms of capability of delivering an agreed deal against the extremely tight timetable proposed (mid July) then Bidder A’ market knowledge together with their broad acceptance of TTF positions (as modified by current market practice) makes this component of their bid particularly attractive. However, it needs to be realised that dealing with a sophisticated bidder who dominates the schools PFI market might, conversely, bring it’s own difficulties in terms of the relative negotiating strength which flows from their market position.

Bidder A provided alternative drafting in numerous parts of the Contract but no “deal breakers” were identified and a not inconsiderable number of their drafting proposals were at or around current market position; certainly, all appeared to be negotiable. The Bidder A bid also had the advantage of evidencing a high degree of funder involvement which would (one hopes) have the affect of assisting compliance with a tight prospective timetable for legal and financial negotiations post preferred bidder appointment.

 Risk allocation and management

There appeared to be a relatively high degree of acceptance of the risk allocation proposals set out in the ITN, and Bidder A’ structure facilitated internal controls and enforcement of obligations.

 Transfer of workforce

Bidder A did not take major issue with the proposed employee clauses of the draft Project Agreement and offered a broadly comparable pension to transferring employees.

TOTAL SCORE FOR BIDDER A:

Strength of bidder 15

Contract conditions 50

Risk allocation and management 5

Transfer of workforce 5

Total 75 (b) Bidder B

Bidder B also provided a relatively full mark-up together with a commentary included primarily by way of internal commentary within the body of the Agreement. The commentary was not as extensive as that provided by Bidder A.

Dealing with the component evaluation criteria in turn:

 Strength of Bidder

Bidder B scored well under this limb because again ownership of the specially established company that would have principal legal responsibility for providing the construction of the City Learning Centre and servicing it for 25 years would be within the principal ownership of the Bidder B group. Bidder B proposed to take a relatively large equity holding in the Company and in addition offered a parent company guarantee to Bidder B Construction who would be responsible for the build phase. In addition, the Bidder offered a parent company guarantee from Mitie FM to its subsidiary which would have principal responsibility for delivery of the services. Overall this represented a strong bid position, albeit not quite as strong as that offered by Bidder A because of the involvement of an external services provider.

 Contract Conditions

Again, a full mark-up was provided which was largely compliant with the majority of TTF and/or current market positions. However, in a number of material regards the Bidder B mark-up revealed positions where the Bidder was at odds with the preferred commercial/contractual position adopted by the Council. It proved difficult to clarify the degree to which these differences were negotiable not least because Bidder B had not involved their funders as fully as Bidder A in consideration of the contractual documentation and the legal positions represented therein. Accordingly, although the three potential funders from who Bidder B intended ultimately to choose a preferred funder, had provided “in principle” approval of the positions taken by Bidder B, these positions were not definitive and in numerous instances it was stated that further bank input would be needed once a particular funder was appointed and there only good advisers were appointed.

In addition, a number of the proposed amendments represented a relatively unsophisticated view of the market (particular examples being the range and extent of authorisations which would be requested from the Council, many of which are not needed as a matter of public law). Nevertheless, on balance this was a strong commercial/contractual offering which subject to reservations about the subsequent input from the Banks did not represent anything that constituted a deal breaker or which appeared non-negotiable. Accordingly Bidder B scored highly on this section.  Risk allocation and management

Again, the degree to which Bidder B dominated the consortium structure ensured that lines of communications and enforcement of obligations were relatively strong.

 Transfer of workforce

Again, Bidder B largely accepted the employee provisions and gave appropriate assurances with regards to availability of broadly comparable pensions.

TOTAL SCORES FOR BIDDER B

Strength of Bidder 12.5

Contract conditions 45

Risk allocation and management 5

Transfer of workforce 5

Total 67.5

(c) Bidder C

Bidder C offered a relatively light, legal mark-up which although ostensibly offering a broad degree of comfort with regard to the acceptability of TTF standard positions and the broad acceptability of the draft Project Agreement offered by the Council gave little comfort that the detailed contractual and commercial positions represented in the Project Agreement had been considered and addressed. Legal and financial clarification meetings confirmed this suspicion. However, Bidder C did provide a more detailed commentary in response to the re-issue of the Project Agreement and this had the effect of improving their original scoring.

Dealing with the component evaluation criteria in turn:

 Strength of Bidder

Bidder C is effectively owned by three parties; King Sturge, Ballast Plc and Royal Bank of Scotland Investments. Accordingly, this particular bidder did not offer the strength of a unified ownership offered by Bidder A and Bidder B. In terms of guarantees of the obligations of the special purpose company Ballast Plc offered a parent company guarantee in respect of the works phase and Wiltshire FM offered a similar guarantee in respect of the services phase.  Contract Conditions

Bidder C improved their position between the first and second stage of the bidding process, but even their second stage commentary on the draft Project Agreement included a significant number of key issues upon which they made no detailed comments. In general, their commentary tended to focus on superficial points rather than addressing key issues which went to matters of allocation of key commercial risks. The overall impression was given that this bidder was, to an extent, “keeping its powder dry” until Preferred Bidder Stage. However, on some commercial issues it is true to say that Bidder C did appear to offer the Council comfort in terms of broad acceptability of the Council’s preferred position and accordingly Bidder C scored reasonably well in this section.

 Risk allocation and management

Despite the absence of a unified ownership of the Bidder, there did not appear to be obvious weaknesses in terms of internal communication structures and accordingly Bidder C were not penalised under this heading.

 Transfer of workforce

Bidder C evidenced broad compliance with the employee provisions proffered by the Council and also offered a broadly comparable pension.

TOTAL SCORES FOR BIDDER C

Strength of Bidder 10

Contract Conditions 35

Risk allocation and management 5

Transfer of workforce 5

Total 55

(d) Bidder D

Bidder D appeared to be the least specific of all of the bidders in terms of the approach that they took to marking up the draft Project Agreement and addressing issues of contractual/commercial risk transfer. Their position did not change markedly between the first and second stages of the bidding process and the overall impression was given was that they were not able or willing to resource this aspect of their bid at this stage, but were willing to hope that they had done enough to make Preferred Bidder Stage when they could reveal their full negotiating hand in terms of preferred legal/contractual positions and commence negotiations proper.

Dealing with the component evaluation criteria in turn:

 Strength of Bidder

Bidder D were the weakest of the Bidders in this respect in that Bidder D itself was nothing more than a bidding vehicle which was owned 80% by an external investment company and 20% by Amey Vectra. This divorce between ownership and bidder identity was a relative weakness for this bidder in that the Council prefers the comfort of dealing with bidders whose ownership, identity and structures are clear and where patterns of accountability are also clear. A parent company guarantee was on offer in respect of the build phase from Shepherd Construction but Amey Vectra were not able to offer similar guarantee in respect of the service provision phase, the (relatively unconvincing) argument being given that sufficient incentive for service provider performance should be provided by the knowledge that the Bank would be concerned to minimise loss to its income stream by service performance shortfall deductions.

 Contract Conditions

Bidder D’s comments were the least convincing and least full of all the Bidders. Their mark-up was not accompanied by detailed commentary and such comments were made tended to concentrate upon the superficial rather than addressing key drafting issues which went to matters of commercial risk transfer. Although broad comfort was given that TTF and market positions were broadly acceptable, the inescapable conclusion was reached that most of the positions represented in the Council’s draft Project Agreement would need to be negotiated/addressed at Preferred Bidder Stage when the Bidder’s funding structures and resources were fully focused upon this particular project. Accordingly, it was not possible to score Bidder D highly for this element.

 Risk allocation and management

Although there were concerns about the affects of internal communication and enforceability of obligation flowing from the relatively disparate structure of the bidding vehicle, it was decided to give Bidder D the benefit of the doubt under this head and not penalise them.  Transfer of workforce

No particular issues were raised by the Bidder in respect of the employee clauses and a general commitment was given as to the availability of a broadly comparable pension.

TOTAL SCORES FOR BIDDER D

Strength of Bidder 5

Contract Conditions 30

Risk allocation and management 5

Transfer of workforce 5

Total 45

4. CONCLUSION

The commercial and contractual evaluation team concluded that the two strongest bids by some margin were those of Bidder A and Bidder B. Not for publication as the report contains exempt information relating to the financial or business affairs of particular persons (Local Government Act 1972, Schedule 12A, Part I, Paragraph 7)

Cabinet – 11th April 2001

Sandhill View PFI Project - Addendum

Report of City Treasurer, Director of Education and Community Services, and Director of Contracting Services

6. Bidders Meetings

6.1 Parallel meetings on technical/operational and commercial/contractual matters were held with bidder A on 3rd April and bidder B on 4th April 2001. The meetings were to discuss the bidders’ responses to various issues papers that were forwarded to them on 30th March 2001.

6.2 The technical/operational issues papers incorporated comments from User Groups e.g. school, library, youth club. The comments drew attention to elements of the proposals that the relevant User Groups believed could be improved such as, reconfiguration of internal layouts and space planning to confirm that allocated areas were sufficient for purpose. In addition, generic issues such as the adequacy of disabled access to all facilities were covered. Clarificiation was sought on the capital cost implications of any changes or modification to the bidders proposals.

6.3 The commercial/contractual meetings covered principally the bidders detailed response to the payment mechanism and links to the Project Agreement (contract). The position of the bidders’ funders (bank) with respect to the Project Agreement was sought. Also, clarification was requested on the conditions attached to guarantees for the proceeds of the surplus land receipt.

6.4 Following the meetings, the bidders were re-evaluated by continuing the process outlined in Section 3 of Part 1 of this report. The results of the scoring were as follows:

Bidder A Bidder B Technical, Operational and 68.85 69.87 Organisational Evaluation Commercial and Contractual 75.00 68.75 Evaluation Financial Evaluation 76.44 72.75 Total Score (Max. 300) 220.29 211.37

It should be noted that the evaluation scores of both bidders has shown some improvement from the initial evaluation shown in the table to paragraph 3.2 of Part 1 of this report. 6.5 A Memorandum of Understanding was drawn up with each of the bidders on the issues discussed on 3rd/4th April. This is intended, together with the detailed proposals returned with initial bids and revised bids, to form the basis of a joint understanding between the Preferred Bidder and the Council and provide a base position for the detailed negotiations, which are still to come.

7. Recommendation

7.1 Cabinet is recommended to appoint bidder A as the Preferred Bidder for the Sandhill View project and to authorise officers to complete negotiations for the project and report back to Cabinet for approval.