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Government indicates that it will compensate bidders on cancelled PF2 projects

The Government has indicated that procuring authorities will have to compensate bidders on projects cancelled because they fail to meet the strict 18-month deadline set out in its proposed replacement to the private finance initiative (PFI).11 Dec 2012

Geoffrey Spence, chief executive of Infrastructure UK, told Building Magazine that he could not guarantee that bidders under the new scheme, dubbed 'PF2', would have their costs reimbursed in all cases. However, he said that there was "a precedent where the government has pulled a scheme and compensated bidders and we are not changing that approach".

Infrastructure UK is the Treasury body responsible for enabling investment in UK infrastructure. Unveiled last week alongside the Chancellor's Autumn Statement, PF2 is intended as a "faster, more transparent" approach to using private finance to fund public infrastructure. Under PF2, procuring authorities will have 18 months to appoint a preferred bidder from the date the project tender is issued. If this deadline is not met, funding will not be approved by the Treasury unless the Chief Secretary has already granted an exception to the project.

However, infrastructure law expert Jonathan Hart of Pinsent Masons, the law firm behind, said that procuring authorities had a "patched history" of reimbursing bidders' costs on cancelled projects.

"The furore associated with the cancellation of the West Coast Main Line competition is an indicator of how rare it is for authorities to offer to refund bid costs," he said. "In this vein, the announcements associated with the stated intention of keeping to an 18-month deadline for new procurements are to be welcomed."

"It may be imagined that this may be used as a stick by the Treasury and Infrastructure UK to ensure that procurers keep to the straight and narrow and don't allow projects to slip. However, given some of the uncertainty associated with some of last week's announcements and the consultation on the 'Procurement Roadmap' slated for January, bidders – and especially SMEs that feel they have been frozen out of procurements in the past - should not get their hopes up too soon."

When the West Coast Main Line franchise competition was cancelled in early October following the discovery of "significant technical flaws" in the procurement process, the Department for Transport announced that all four bidders would have their bid costs reimbursed. It was later revealed that this would cost the Government an estimated £40 million.

PF2 is the Government's proposed replacement to the controversial PFI scheme. Among other changes, PF2 will see the Government take on the role of a project shareholder holding a maximum stake of 49%. This will allow the public sector to recover a share of the profits made by projects in the same way as private sector investors. The £1.75 billion privately financed element of the Priority Schools Building Programme, which will see rebuilding and renovation work on the 219 schools in England in the worst condition, will be the first project to be procured under the new arrangements.

Pinsent Masons infrastructure law expert Barry Francis said that the absence of a "full pipeline" of future projects, as well as "some scepticism" about the ability of procurers to meet the 18 month deadline, would be likely to discourage bidders from reinvesting in PF2 bids. Experts at the firm pointed out last week that many of the "landmark" projects referred to in the Autumn Statement had been part of the Government's National Infrastructure Plan for some time.

"A requirement that bidders be compensated in these circumstances would go a long way to overcome these points," Francis said. "However, there will presumably be qualifications to prevent private sector negotiators using the possibility of reimbursement to squeeze last-minute concessions. Additionally, the amount of cost reimbursed may be rather less than the real costs to the organisations involved."

Recent Infrastructure Experience