By Luke van Grieken and James Morgan-Payler
Recently, there has been much media coverage and public comment on the problems facing distressed Australian PPP projects, including the delays to the Victorian Desalination Plant project and the economic strife facing many road PPPs in the eastern states.
The spotlight on PPP projects has also brought into question the efficiency and efficacy of the PPP procurement process itself. In particular, the private sector has commented on the increasing costs of bidding on PPP projects. Further, in our experience, PPP tender processes in Australia are becoming more complex and often fall behind the target procurement timelines.
In this article, we outline how PPP tender processes typically work and some common problems with those processes. We also suggest a number of possible ways to improve PPP tender processes and the PPP model generally given the current economic climate.
How do PPP tender processes usually work?
Expressions of interest (EOI) phase
In this first phase of the formal tender process, the government advises the market about the project, the procurement process and timelines and seeks to confirm the level of interest of the market and other market feedback. Bidders submit EOIs in response to the government’s Request for EOIs. The project team then evaluates the bidders and shortlists those most capable of meeting the project objectives. In recent Australian health and transport PPPs, EOI phases have averaged approximately 5 months1.
Request for proposals (RFP) phase
The government will next issue the RFP documentation to the shortlisted bidders, which will include the government’s output and technical specifications and the commercial and contractual frameworks for the project. The shortlisted bidders will then submit their proposals, usually within 6 months after the RFP was issued. The project team will evaluate the proposals against specified evaluation criteria and carry out a question and answer phase and an interactive tendering process (depending on the jurisdiction). The RFP phase concludes when the government announces its preferred bidder. On recent PPPs, this phase has taken between 8 and 10 months in total.2
Negotiation and completion phase
Typically, following selection of the preferred bidder, the negotiations between the parties commence in earnest. During this phase, all outstanding design, legal, commercial and financing issues are finalised, followed by execution of the contracts and financial close. The length of this phase can depend on resolving financiers’ unresolved issues, but is generally around 3 months.3
What are the problems with the current PPP tender processes?
Common criticisms of PPP tender processes are that they are too long, too expensive and too complicated. On some projects, there have also been concerns about a lack of genuine dialogue and flexibility due to strict probity requirements.
Tender processes take too long
In Australia, the average time from EOI to financial close for social infrastructure PPP projects is in the order of 14 to 19 months, with health projects at the higher end, and 18 months for transport infrastructure projects4. This is less that the average procurement timelines in the UK, but longer than in Canada, which has reduced average procurement times from 18 months to 16 months5.
However, in our experience, the procurement time for some very recent PPPs has been far greater than these averages, and key procurement milestones are often not kept. For example, the Victorian Comprehensive Cancer Centre PPP Project took over 25 months to reach financial close in December 2011 after release of the Request for EOIs in November 2009. The government had originally intended to reach financial close by the second quarter of 2011. The delay was partly due to the extension of the RFP phase by 6 months to include a “best and final offer” (BAFO) phase. In addition, unusually, a relatively lengthy “exclusive negotiation phase” preceded the official announcement of the preferred proponent. This is contrasted with the procurement time of a recent Canadian PPP, the Humber River Regional Hospital, in which the EOI phase was 5 months and the RFP phase was 7 months, leading to financial close in September 2011, a total of only 16 months.
Bid costs are too high
Private sector PPP participants have also frequently commented on the relatively high cost of bidding for Australia PPP projects6. KPMG has estimated that average bid costs in Australia are 1% to 2% for winning bidders, and 0.8% to 1.2% for losing bidders7. Bid costs are comparatively lower in Canada, being about 0.5% to 1% for winners and 0.35% to 1% for losers, but are higher in the UK8. It is our experience that that design costs comprise a majority of the bid costs, followed by due diligence, legal, financial and other costs. Whilst long procurement processes are expensive, other key reasons for high bid costs include excessive documentation and information requirements during all phases, inconsistent tender documentation and inefficient and protracted government evaluation and decision making processes. It follows that total transaction costs for government are also very high.
PPP procurement is too complex
In our view, the Australian PPP procurement model is perceived to be more complex than in other jurisdictions. This, as well as the high bid costs, is a key disincentive for new entrants, including international entities. Some complexity is due to the Australian focus on design quality, innovation and a tendency for Australian PPPs projects to be much larger than in other countries. In our view, unnecessary complexity also arises from the level of detailed design documentation, operational plans and commercial information required to be provided by all bidding consortia and the exhaustive requirements for the legal documentation and departures schedules.
Lack of dialogue and flexibility due to probity concerns
Since the introduction of Partnerships Victoria’s Interactive Tender Process (ITP) guidelines in 2005, we have seen much greater fruitful interaction between the government’s project teams and the shortlisted bidders. In our experience, the market views ITPs very favourably in Australia as it does in Canada. However, ITPs are used inconsistently across projects and states and with varying levels of success, largely depending on the skills and experience of the project teams. In particular, private sector participants have felt that on some projects, the probity rules were allowed to dominate, resulting in the project team being denied contact with the prospective client9. Similarly, some participants have commented that the terms of the Probity and Process Deed required to be signed by respondents are too onerous and inflexible.
Ways to improve PPP tender processes
In our view, Australian governments should modify their PPP procurement processes to overcome the above problems, in ways which lead to greater market confidence and engagement and ultimately provide better value for money for taxpayers.
To achieve this, governments could look at some of the successful strategies used in other jurisdictions, particularly Canada. At a high level, the strategies used overseas include10:
- disciplined adherence to procurement schedules;
- commitment to an outside date to reach financial close (with penalties and remedies as applicable for failure to abide by the timeframe);
- less focus on design, particularly architectural design;
- less information and less design development required within bids;
- greater standardisation of contracts, with contracts being rolled forward to subsequent projects without substantive amendment;
- less use of further bid stages;
- use of a two-staged evaluation procurement process (i.e. technical evaluation, followed by financial evaluation);
- earlier selection of preferred bidder coupled with more reliance on the preferred bidder developing its proposal;
- common procurement of information requirements (such as geotechnical surveys) on behalf of all bidders;
- greater disclosure of public sector comparator (PSC) to bidders in order to enhance transparency and understanding of the expectations; and
- government contributions to bid costs of all bidders, or payment of an honorarium by the successful bidder to the losing bidders towards their bid costs.
Some of these strategies may not be appropriate in the Australian market, given the different drivers and approaches taken by governments here (especially in respect of design development and evaluation). However, in our view it is important for governments to give stronger commitments to procurement schedules and adopt other measures to reduce tender process times and bid costs.
For example, we suggest that wherever possible, the governments should avoid any further stages such as BAFOs. In our experience, additional stages can add significant time, cost and complexity and frustrate the public and private sector participants. They may also result in bidders taking a strategic view not to put their best foot forward at the RFP stage. We consider that BAFOs could be avoided by better genuine dialogue with shortlisted bidders about the government’s technical and operational requirements and greater disclosure to bidders of the PSC, including the risk-adjusted PSC.
Governments should consider reducing the amount of information required in competitive bids, to only require certain information from the preferred bidder. There may be limited benefit to the government in conducting a lengthy evaluation and clarification process in respect of all detailed design and service requirements with two or more bidders. To speed up the process, the issues which have no price or time impact should be left for discussion with the preferred bidder only.
Finally, we note that a common thread to feedback from private sector PPP participants is that the skills, experience and confidence of the government’s project team is critical to the efficiency and timeliness of the procurement process, especially the ITPs. This very issue was the subject of the Victorian Parliamentary “Inquiry into Effective Decision Making for the Successful Delivery of Significant Infrastructure Projects” held in March 2012. The submissions clearly show strong support for continued improvement of competencies and skills within the public sector. This echoes other market commentary emphasising that governments should prioritise recruiting and retaining high quality project team members for PPP projects.
Other improvements to the PPP procurement model
In addition to improving the PPP tender process itself, we consider that governments could make other changes to the PPP model to benefit the public and private sectors.
Governments should retain risks which they can best manage
In our experience, transferring certain risks to the private sector can attract a significant price premium and programming impacts. To avoid those price and time impacts, where appropriate governments should consider retaining responsibility for additional risks which it can better manage, or giving the private sector better opportunities to conduct meaningful due diligence.
For example, governments (and the National PPP Guidelines) typically seek to transfer site conditions and environmental risks to the private sector, even where bidders are not given sufficient opportunity or access to inspect and test the site to thoroughly assess and price those risks. Accordingly, bidders may include in their bids significant risk premiums and contingencies.
Similarly, private parties are often required to take access risk, obtain planning and development approvals or to manage user group input during the design development process, even where the public sector is in a better position to manage those processes. In some cases it may also be appropriate for the government to be more involved in managing industrial relations to prevent delays and potential disputes during the construction phase.
Governments should better understand the downstream contracts
Whilst the downstream contracts are based on the risk allocation in the head contract or project agreement, the State ultimately has limited visibility and control of the terms of those contracts. In fact, pressure from the project sponsors and its financiers can force contractors to accept even greater risk than is accepted upstream. This can lead to contractors going into “claims mode” and ultimately a distressed project. We can see benefits in ensuring that both the upsides and downsides of the project agreements end up in the construction and facilities management contracts. Similarly, greater communication and visibility between the government and the builder during the bid phase often assists in better understanding between those parties as to each others drivers and risk appetite.
Consider Dispute Resolution Boards
To avoid particular problems recurring on future projects, we believe that governments should consider including a dispute resolution board (DRB). Its primary function is to prevent disputes, or at least assist the parties to achieve a quick, cost-effective and acceptable resolution. They do this by involving the relevant independent persons at an early stage, as a real project participant. DRBs are particularly useful for projects which are complex, high risk, high profile or have many parties and stakeholders, such as large PPP projects.
As a number of recent Australian PPP projects are distressed, and the PPP model is in the public spotlight, and in an environment where demand for public infrastructure remains high and in order to avoid disincentives for equity investors (particularly superannuation funds going offshore for projects) we believe governments should strongly consider taking steps to improve the PPP procurement process and model generally.
In particular, governments should closely look at the successful strategies used overseas, especially in Canada, to reduce tender timelines, bid costs and the complexities in the process, as well as improving fruitful communication with bidders. The benefits of addressing the current problems could lead to lower costs, fewer delays, greater public sector engagement and new PPP participants and financiers, all of which could ultimately provide better project outcomes and value for money for taxpayers.
1Based on Norton Rose research of five Victorian and South Australian PPP projects which reached financial close between 2009 and 2011.
4KPMG, “PPP Procurement: Barriers to Competition and Efficiency in the Procurement of Public Private Partnerships”, May 2010, commissioned by Infrastructure Australia, pages 27 and 28.
5Ibid, at page 38.
6For example, see the Australian Constructors Association’s comments in its publication “Public Private Partnerships: Putting Guidance Into Action”, available at: www.constructors.com.au
7KPMG, n. 4 at 36.
8KPMG, n. 4 at 36.
9Australian Constructors Association, n. 6 at 14.
10Refer generally to The Canadian Council for Public-Private Partnerships paper “The Impact of the Global Credit Retraction and the Canadian PPP Market: Deliberations by the industry members of the Canadian Council for Public-Private Partnerships”, published Spring/Summer 2009 and Infrastructure Australia’s issues paper “Infrastructure Finance Reform”, published in July 2011.