Item 2 is a discussion on a contingent liability into which the Scottish Government proposes to enter. Under a written agreement between the Government and the Finance Committee, the Scottish ministers must seek the committee's approval before entering into a contingent liability of more than £1 million.
Ministers seek Parliament's approval for reimbursement of bidders' costs in the event that the contract for the Forth replacement crossing does not go ahead or is not awarded, either because the proposed Forth replacement crossing bill falls or because the Scottish Government decides not to proceed with the contract.
I have no difficulty with the principle, but this situation has never arisen in the lifetime of the Parliament. Is it correct to say that we have never had a contingent liability that sought specifically to cover companies' tender costs?
That is correct. This is an unusual case, in that we are considering carrying out the tender process before there is statutory approval to proceed with the contract. Therefore the contracting industry will see significant risk in the fact that the project is not secure in terms of its being taken forward.
Let me develop that point slightly. As we speak, lots of substantial construction projects are under way, such as the Southern general hospital, which is worth about £850 million, and the M74, which is worth £700 million and is—we would all agree—mired in controversy. However, at no stage was contingent liability sought for the cost of the tender processes in those cases.
In both those cases, statutory approval to proceed with them was already in place—the orders for the M74 were in place and, as far as I am aware, the planning approvals for the Southern general are in place.
Can I pursue with you the nature of the risk? The penultimate paragraph of Stewart Stevenson's letter talks about the risk being low. However, the construction industry regards the risk as being quite high. Is it just that the level of interest that you are likely to get in what will probably be the Government's most iconic construction project is so low that you are having to incentivise participation?
No. There has been considerable interest in the project, but it has been quite clear from discussions with the industry, at market-testing stage and during the pre-tender consultations, that we have been having with up to 39 organisations that have expressed an interest in the project—in so far as they have asked for pre-qualification documentation—that contractors believe that there is a significant risk that they will have to commit significant resources in the face of a possibility that the project might not receive the statutory approvals. That is the industry's view. Our view—ministers' view—is that there has been cross-party support for the project, which means that the risk that the project will not receive statutory consent is low. That said, contractors will have to commit quite considerable sums—up to £10 million, we believe—before that statutory authority is in place.
I am stunned to hear that you have had 39 expressions of interest—I would have thought that there would have been less interest. Given the amount of interest that is evident, and taking into account the fact that we are in a time when there is a tightening of financial belts, is the proposal actually necessary?
On the 39 expressions of interest, you will appreciate that companies consolidate when dealing with a project of this size. Therefore, we would be looking at about five world-class bidders that would be capable of anchoring the project, and which would suck in other companies.
Are you seriously telling me that—given that the Scottish Parliament has already demonstrated its cross-party support for the project—the City of Edinburgh Council's views will affect the views of quite major contractors, who must be used to the small-p politics that surround such projects?
I do not think that the council's opinion can be discounted, particularly with regard to Edinburgh's current high profile in transport projects.
I think that we are getting into deeper waters.
If I understood Mr Howison correctly, he said that the various companies would probably coalesce into consortia of some kind. There might be five consortia, each made up of two or three companies. Is that what you think might happen?
We think that there will probably be consolidation into consortia of at least four companies.
That will dilute the risk, because it will not be only one company—albeit that it would be a major multinational company—that has to take a risk of £10 million. The risk could end up being about a couple of million pounds for each company in a consortium.
The risk would be in relation to the shares that the various parties took—you are right that the risk would be split between those parties. Some would take more and some would take less, but in aggregate it would come to £10 million.
Where does the figure of £10 million come from? Mr McLaughlin said that that was your estimate. How do we know that it is £10 million? It could be £8 million or £6 million.
The proposition is not that we would pay £10 million to each bidder; it is that we would pay the expenses that they incur up to a cap of £10 million. The discussions that we had with industry before we proceeded with the competition suggested that the amount of money that companies might spend would be in the range of £5 million to £10 million. Since we published the contract notice and received further information, several of the bidders have confirmed that the sum would be up to £10 million, at the higher end.
We are talking about what will probably be the biggest construction contract for the next decade. Companies are queuing up to express an interest in it. I am not surprised by that, given the current state of the economy. They all want a slice of the action, but they want belt and braces, because they want the Scottish Parliament to underwrite their bidding costs just in case of the very outside chance that the bridge does not go ahead. Those companies must take on such risks all the time throughout the world. Why on earth should Parliament fork out a sum on that—it could be £30 million if there are three bidders—especially when we are told that we will have less money to spend?
I would have been able to answer that at much greater length had the meeting been in camera. I can say that the information that we have leads us to believe that we are not secure in getting a competition or even a single bidder, without making a commitment to meet those costs on a contingency basis.
That is as far as that line of questioning can go.
That is fine.
You seek a contingent liability, with a payment to be made if the bill does not proceed. You expect there to be three bidders, with the liability being the payment of tendering costs up to £10 million. Can I be clear that, if the bill proceeds, we will not make any direct payment of tendering costs to the bidders?
We are not here seeking approval to pay tendering costs of bidders in the event that the project does not go ahead. We are looking at potentially reimbursing unsuccessful bidders, if the project goes ahead, for the costs incurred in tendering for the project.
Let us assume that the bill is passed and that there are three bidders. Are you saying that the two unsuccessful bidders will have their tendering costs reimbursed?
Yes—up to a maximum of, I think, £5 million.
Is that normal practice with such contracts?
When such significant bidding costs are involved, that is seen as normal practice, to ensure competition.
Can you give an example of that happening previously with a contract with the Scottish Parliament?
We offered similar sorts of terms on the upper Forth crossing project.
You say that tendering for the principal contract, and the passage of the bill, will run concurrently. What is your understanding of the precise timetable for that?
We anticipate that the bill will be introduced in November—I am not sure of the precise date, but I think that it will be around 16 November. We anticipate that invitations to tender will be issued in early December. We expect the tender process to run for up to a year, with bids returned in late 2010. We expect to be in a position to award the contract in the spring of 2011, by which time we would expect the Forth replacement crossing bill to have been enacted.
In the penultimate paragraph on the second page of his letter, the minister talks about the circumstances in which the contingent liability might crystallise. I understand the point about the bill not being enacted, but he also refers to any
The guarantee would apply if the bill had been enacted but for some reason Scottish ministers decided not to proceed with the contract.
What if they decided not to proceed according to the timescale that they had originally envisaged? That would be quite reasonable, although not necessarily desirable. We could foresee a circumstance in which the contract might not be awarded in the original timescale and might be delayed by one or two years.
In those circumstances, we would be faced with procurement regulations, to the extent that we could extend the tender process. Normal circumstances are that tenders are open for acceptance for up to three months. If a decision cannot be made at that time, it is not unusual to seek another extension. However, that would normally be for about another three months. Beyond six months, we get into potential challenge territory under procurement law.
Did I hear Mr Howison say that he believes that a bidder will not be secured for the project without the guarantee of a contingent liability?
I believe that we would not secure competition and that we may not even secure a single bidder.
On other contemporary projects, you will both be familiar with the Borders railway, which is a project that goes into my constituency and that has a capital cost of £300 million. The legislation has not been triggered, and nor has the project yet been put out to tender in the Official Journal of the European Union. Are you considering a similar guarantee for that project, with regard to tender costs?
I am not aware of any plans to do so. The significant difference with the Borders rail project is that the relevant statutory powers are already in place. The same risks do not exist.
The guarantee is in one part, not two. In other words, there is not one part that deals with whether Parliament gives approval and another that deals with the decisions of ministers. Borders rail has had statutory approval but the legislation has not been triggered, so a guarantee would still apply to a project such as Borders rail.
As I say, we have no plans at this stage to consider similar arrangements for the Borders railway.
Would that decision be taken by officials or a minister?
It would ultimately be taken by a minister.
What consideration has been given to risk balance? What risk is there to private sector contractors when it comes to costs that are associated with tendering for the project?
There is always a risk in bidding for a contract, which is generally assumed in the overheads that the contractor bears. A contractor does not win every tender that it goes in for, so the contracts that it wins must include an allowance for those that it does not win. The Forth replacement crossing contract is a little bit unusual because of its scale and the amounts of money that are at risk.
My question was about the tender process. If I understand correctly, the taxpayer covers up to £5 million of risk even for unsuccessful bidders. If a minister decides to delay or not to activate the legislation, the taxpayer picks up a £10 million tab for the successful bidder. There is no risk to the private sector when it comes to the tender process because the taxpayer picks up the tab for it all.
I will address first the situation in which the competition results in an award and a bidder is unsuccessful. We do not want there to be no risk to the bidder at all, because contractors would enter the competitions for the fees that they get from them rather than for the prospect of doing the work.
Up to £5 million.
It is actually half of their audited costs up to £5 million. The presumption is that it would cost them up to £10 million but they would get only half of that back if they were simply unsuccessful. The alternative to providing that would be to accept that the winning bidder would simply allow for its potential risk losses as an overhead to its price. If we provide the support for unsuccessful bidders, contractors who bid will be aware that the amount of money that they put at risk is only half the bid cost. Therefore, their overheads to recover the potential unsuccessful bids would be only half of what it would be in any event. The theory is that the net cost to the public purse of giving that award in the situation in which the contract is awarded should be £0.
Will that apply to the £300 million Borders railway scheme as well?
I cannot tell you that at the moment, because the contract and tender documents have not yet been prepared for that project and no procurement has been started.
We are not getting into that questioning.
It is interesting to note that we have been asked to permit the underwriting of £30 million of taxpayers' money but we do not know whether, in another week, there will be another, similar letter.
I am sure that you can raise that in other fora.
Perhaps we could debate that after we have asked our questions. There is a point that I would like to make with regard to that.
If the contract were not awarded, each bidder would be reimbursed its costs up to that limit.
So, there is a different risk profile for those who are unsuccessful bidders.
No. If the process were to be aborted, there would be no winner and we would not make a distinction between the participants.
Yes, but my question was about what would happen to the successful bidder if the minister decided not to proceed with the contract or the project did not continue. In that situation, the relevant amount is the costs that each bidder might incur
That is right.
So there is a different risk profile for them.
Yes.
I would like to clarify a couple of things for the record. First, will you clarify where the money would be paid from? I think there was a bit of confusion about that earlier. My understanding is that the funding would come from the Government's budget, but that Parliament's approval allows that to happen under the 2005 agreement.
That is my understanding.
Thank you. My other point goes back to what Jeremy Purvis was saying. I thought that I misheard when James Kelly was asking his questions. My understanding from reading the minister's letter is that a contingent liability of £10 million per bidder is sought so that, if the contract does not go ahead because statutory obligations are not met or because ministers decide not to proceed, those who had been accepted as bidders would be paid up to £10 million each, but the amount due would have to be interrogated in each case before any payment was made. Have I got that part right?
That is correct. They would have to submit a bona fide tender in the first place and their tender costs would be subject to audit.
Right. What I have now picked up—I think, from the confusing discussion that we heard—is what would happen if there were three bidders and the contract went ahead with the successful one. The contingency sum would be absorbed within their normal costs and normal payments under contingencies, prelims and things like that. Are you saying that, in that case, the two unsuccessful bidders would be given a payment?
Yes—a payment of up to £5 million each.
Why?
That reflects the fact that it is very expensive to bid for such contracts. A number of large projects are out on the market at the moment, including the crossrail project in England and the Olympics, as well as a number of major projects in Europe. As Mr Howison said, contractors have to take a view on the risk that is involved in bidding for and winning work, and they will consider where the costs and resources are best expended. We want to ensure that we get the best possible competition for the project, the cost of which will be about £1.7 billion, because getting good robust competition is likely to save the taxpayer a significant amount of money. We believe that spending the money represents value for money in attracting the quality of bidders that we seek and getting them to bid competitively.
This discussion could go on for quite a long time. When I studied the minister's letter very closely—obviously, from a background of much more limited experience than either of our witnesses—I did not pick up the point that has just been made. In my view, the minister's letter states only that, should the contract not be awarded, ministers will
I will clarify the point. It is a remote possibility that the bill will fail in Parliament or that the Scottish Government will decide, for some currently unforeseen reason, that it does not want to go ahead. The matter therefore comes into the category of contingent liability. The expectation and probability is that the contract will be awarded and that payments will be made to the unsuccessful bidder. In accounting terms, those circumstances are treated not as a contingent liability but as a provision within the minister's budget. The minister's letter is absolutely correct. It seeks cover for contingent liability in the unexpected event that the contract does not proceed. I hope that that explanation helps.
It helps a great deal. You are saying that the minister's letter is technically correct. That is fine, but we must understand the position before we make a decision. Some explanation from the minister of the difference between provisions and contingent liabilities is required, or the waters will be muddied.
If I read the committee's mind correctly, doubts remain. We should therefore write to the minister seeking further clarification of the points that members have made, referring him to the Official Report.
Given the position on this project and the points about consistency of application that I have made in relation to other projects, it would be appropriate for the committee to ask the minister to attend a committee meeting to take questions from us. Officials cannot reply to questions about the policy decisions that have been taken, which need to be interrogated.
There is enough muddying of the waters without our bringing in another issue. We must deal with the issue of contingent liability in relation to the Forth crossing in the way that is laid down by the 2005 agreement. If the committee needs more information to inform its thinking on the matter, that is fine, but the question of other projects is an entirely separate issue. The committee could address that in another way, but not as part of the decision that must be taken on the Forth crossing.
I ask Mr McLaughlin to clarify one point. You said that similar terms were offered to unsuccessful bidders for the upper Forth crossing.
That is correct.
How many bidders were there? I cannot remember the number. I do not need the exact sums. If there were two unsuccessful bidders, were they paid a proportion of their costs?
I think that there were three bidders. I would need to check, because it is some time since the contract was awarded.
Was that the first time that you paid out to unsuccessful bidders?
As a matter of routine, we have reimbursed site investigation costs that contractors incurred, quite rightly, in carrying out due diligence before entering into a contract.
It would be helpful for the committee to have more information. I am loth to do anything that is likely to prejudice the timescale of the project—I think we all recognise that it is on a tight timescale. Is it feasible, under the committee's procedures, to move to take some more evidence in private today, so that we might get some fuller responses than it has been possible to get in public?
I propose that we write to the minister, but we could examine the wider policy issues as part of our work programme. That would go some way towards addressing the issue that Derek Brownlee has just raised.
Can we ask what difference a week would make with regard to approval of contingent liability?
How urgent is this?
We hope to start the tender process at the end of November. Without a decision at that point, I believe that the process could not go forward.
So an extra week would not unduly prejudice the process?
No. We are saying that bidders and contractors will look for that security to be in place before they enter the tender process, which is likely to start towards the end of November, going into December.
However, the final submissions from those who are interested are due on 23 September. I am concerned about the impact that any doubt around the situation that might be conveyed in the Official Report would have.
Everybody is now leaping in. I suggest that we take evidence next week. That would not be the end of the committee's involvement in the process; it would have further input at a later stage. We should find out the lie of the land and allow the minister to respond, and we can make the wider issues part of our work programme.
I understand completely what Mr Howison is saying, and the last thing that we want to do is put out a perception that the committee is not behind the need to move forward on the Forth road crossing. It is imperative that we record that we do not have a problem with the idea of contingent liability, but that we feel that we were not given enough information to properly inform our discussion and our decision.
I see that there is general agreement on that suggestion.
I would like to ask about what I have just heard. Did I hear correctly that interest in the project is due back by 23 September?
Yes.
On 23 September, interested parties who have already declared an interest will have to submit to us a response to a questionnaire that we have put out. On the basis of that, we will make a decision on who should go forward. That will be the first significant and substantial response from interested parties.
Does that questionnaire include any mention of contingent liability on the taxpayer?
In response to expressions of interest, we have put out a questionnaire and a prospectus, which records that it is the intention of ministers to proceed on that basis.
Therefore, anyone who has expressed an interest in the project and is replying to the questionnaire has done so on the basis that there will be a contingent liability.
That is correct.
Without the Parliament having any consideration of it at all.
No—it is subject to parliamentary approval.
Is that specifically stated?
Yes.
Other members may not agree, but I think that there is a case for the minister to appear before the committee with regard to this specific point, given that part of his letter refers to
I think it would be helpful to say that we intend to take evidence next week and that we should invite the minister, because I think that that is the mind of the committee. Is that agreed?
Members indicated agreement.
I thank the witnesses for giving evidence. Does John Howison want to make any final comments?
We would be willing to give you far more information in camera, which would cast a much greater light on the situation.
We considered a written request from officials about that but, frankly, sufficient justification for it was not given. Until sufficiently robust justification is provided, I think that the information should be given in public and that we continue to act as we have done since the start of the meeting.
Okay.
I thank both our witnesses.
Meeting suspended.
On resuming—