Traditional procurement and scottish governments needs on construction projects

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"Is Traditional Procurement Suited To Meeting The Scottish Governments Needs On Construction Projects?"

1. Introduction

The realization for the Scottish Government in today's construction market is that the bringing together of the many parties involved, including the client and the consultants are paramount to a projects success. The government can be described as an experienced client as they build on a regular basis (Masterman 1992 and Walker 1984) the four most important requirements to the government are planning/design, project finance, project implementation/management and the project definition. These require a representative of the Government to have an active role in the construction process to ensure success.

Choosing the appropriate procurement method is a complex and challenging process for the Government they will choose a route based on a variety of requirements being; Time, Cost Certainty, Price Competition, The risk involved, Flexibility, Complexity of the project and the quality standard in which the end user is after.

Procurement routes can be classified under various types; traditional, design and build, management contracting and PFI/PPP. Each of the procurement methods have an array of benefits attached to them with the selection process for the route to take down to the Government.

As the "SNP government has long been an opponent of PFI/PPP to fund public projects" they have scrapped there use in Scotland. With it said that the failings of "Labour's over inflated PFI/ PPP schemes leaving a debt of £4500 for every Scottish tax payer" The SNP is has committed to putting money into front line services rather than the more costly PFI/PPP Schemes.

As the PFI/PPP schemes are no longer being used in Scotland the main aim for my dissertation is to look into "Is Traditional procurement is suited to meeting the government's needs in the procuring of construction projects".

To achieve this aim the following objectives were set;

* what is the history and the key elements of traditional procurement and its main advantages and disadvantages,

* what are the key elements of the other procurement routes available and their main advantages and disadvantages,

* how are projects currently being procured by the Scottish Government,

* analyzing the governments selection criteria to decide on the appropriate procurement method,

* To identify why contractors strive to meet the clients needs and the methods they are using in attempting to meet their needs.

Background & History to PFI

PFI was started as a procurement route the private sector to the public sector procurement to enhance the government's procurement practices. Cartlidge (2006) explains "all public services are delivered by a private person who may or may not be public sector employees". This was due to the public sectors traditional procurement routes being blamed for the exceeding of budgets and projects being delivered late. A 1999 NAQ study found that 73% of public sector works being over budget and 70% being completed late. With the main costs for these problems being borne by the taxpayer the government expressed "its need for change in how it procured future works" (HM Treasury, 2003).

The treasury set up a committee chaired by Sir Ryrie (at time second permanent secretary) in which to look at ways in which the introduction on private finance could help nationalized industries. From the committee two principles were set up reported as Ryrie Rules. "The private sector shall only be utilized if it is proved to be more cost effective being carried out by the public sector" "Privately funded project shall not be additional to public expenditure unless agreed by ministers." (HM treasury, 1995)

These rules were criticized for giving little incentive for the public sector to unlock the skills of the private sector and where seen as being too many hurdles to be utilized properly. The rules were taken out of use in 1989.

John Major in 1995 made the announcement that the Treasury would now allow public funded projects to be progressed through the private sector. This change from how projects where being procured before and was seen to be a different stance on the governments outlook on private finance (HM Treasury, 1995)

PFI was officially introduced in 1992 by a Conservative Government being included in the Chancellor of the Exchequer's Autumn Statement. Its introductions main aim was to use the backing of the private sector to finance projects with no need for the public sector to provide finance. "This represents a fundamental change in the focus of the public sector, away from being a direct provider of services to the public and towards becoming a procurer of services and regulator" (HM Treasury, 1995)

Along with this the government announced it would use the private sector on joint ventures to take the lead along with the public sector. With the Government putting its backing behind the PFI scheme it was seen by many as another way of privatization. Its introduction faced criticism universally from all areas and came under serious scrutiny from the UK Construction Industry. The main benefit that the use of PFI schemes gave was that it dramatically increased the number of public buildings without the need for heavy capital spending.

Despite the government pressure and emphasis on PFI projects it failed to create the expected input from the private sector due to the substantial up-front costs that where typical with preparing a PFI bid. Due to the high costs of bidding for such projects there were all being tied up by the larger PFI consortiums which in turn ensured that projects were delayed on site for up to two years. These issues are likely to impact on VFM for the government.

PFI was refined and given more momentum when Kenneth Clark the Chancellor at the time between 1993 and 1995 started a new panel using important figures in the world of the private finance sector which here told that they would become the main source e for growth in the public sector. (Allen 2003). The government aimed to maximize the use of private finance and only resort into dipping into the public purse when PFI couldn't provide VFM. With further changes being implemented in the process of the PFI in 1995 the government gave a vote of confidence for PFI but this fell well short of the targets that where set for the 5 years (HM Treasury 1995)

When Labour came to power following the election in 1997, Malcolm Bates was commissioned with carrying out a review of the whole PFI process and looking in to why the private sector uptake on entering in to PFI partnerships was poor. The Bates review reported in June 1997 came up with 27 recommendations which gave the Labour party a number of options designed to expand the appeal of PFI. "the review made clear recommendations for removing the barriers hindering the PFI process, including measures to keep down the costs for tendering for PFI contracts" (Atkinson, 1999).

Bates recommended that the previous Private Finance Panel be scrapped in favor for a new taskforce which would look after the policy and central input on projects. The taskforce was setup into two sections one being the "Policy Arm" the other the "Project Arm". The policy arm was to fix the major flaws in the management of the PFI process". Where the project arm would keep an eye on the progress and help various departments in the identification and setup of template documents for subsequent use.

New labour was seen to have transformed PFI successfully to make it into a viable option for both the private and public sector to work together in partnership With one of there promised to reinvent the function of PFI making it more practical and with a greater degree of common sense. The Labour Government are confident that at last they have created a procurement route in which the public and private sectors can work together and be a process to be proud of(HM Treasury, 1999)

The value of the amount of work awarded to date through PFI schemes is very hard to quantify the figures constantly change along with the way they are analyzed. Recent figures suggest that over 500 PFI contracts in the UK with a capital value of £60 Billion with costs expected to rise to £181 Billion (Telegraph)

Key Aspects of PFI

The key aspects of a PFI project are Risk transfer which is fundamental to the whole PFI process with the risk being transferred over from the public sector to the private made clear by (DETR 1998) "PFI projects take a significant amount of the risk relating to a variety of issues on the project and transfer it to the private sector"

The public sector will not aim to transfer all of the risks to the private sector as the total cost will be paid for through higher service charges. This means that the whole objective of offsetting risk is to ensure that risk is allocated correctly with the optimum risk imposed on each party to ensure value for money. The correct allocation of risks will ensure that the programme and cost overruns from previous years from the traditional procurement route will be a thing of the past.

With the length of a PFI contract being between 20 and 30 years it is the responsibility of the private sector to ensure that the project that has being provided is of a standard to reduce the amount of repairs that will be required. Thus making the project more profitable to the private sector and will utilize a better building for the public centre.