The emphasis of Australian Governments on achieving value for money drives higher bidding costs on Australian PPPs. But bid costs can be reduced without affecting value for money.
Public Private Partnerships, or PPPs, enjoy a good reputation for delivering projects on time and within budget. However, Australian PPPs are routinely criticised for having high bid costs. Indeed, some say the bidding costs are excessive. This article considers the reasons for this, and what can be done to reduce bidding costs without diminishing value for money outcomes.
PPPs take longer to procure
PPP procurement processes take longer than many traditional types of procurement. There are many reasons for this, including:
- the need to short-list bidders before requesting detailed proposals – most bidders won't invest in the significant cost of preparing a detailed proposal unless the field of potential bidders has been narrowed;
- the need for government to determine not only its short-term requirements, but also its long-term requirements, before calling for detailed proposals;
- the due diligence undertaken by debt and equity financiers; and
- the need to finalise contracts with a larger number of counterparties.
Infrastructure Australia review of bid costs
In response to industry concerns about the high cost of bidding PPP projects, Infrastructure Australia commissioned a detailed review bid costs for PPPs by KPMG.
The key findings of the review included:
- Australian PPPs are generally more complex than those in other countries, because of our focus on value for money, our Federal Government system (with different laws and policies at the Federal level and in each State and Territory), and our complex tax system.
- The average value of Australian PPP projects is also considerably higher than those in other PPP markets, such as the UK and Canada.
- These factors make like-for-like comparisons with procurement processes of other countries difficult.
- That said, the average procurement time for Government-funded PPPs in Australia of 17 months is close to world's best practice (Canada – 16 months), and is considerably shorter than the UK (34 months).
- Australian PPP bid costs have been 0.5-1.2% of project capital value, which is higher than Canada (0.35 – 1% of capital value), but considerably lower than the UK (2-3% of capital value).
- For smaller projects, where a like-for-like comparison is possible, Australian bid costs are perhaps 25-45% higher than those in Canada.
- The largest component of Australian bid costs is usually design costs (50-60%, up from approximately 40% in 2005). Legal fees have dropped significantly from 40% in 2005 to 10-12% in 2010.
Are bidding costs excessive, and is competition being affected?
According to KPMG, bidders typically spend about A$2.5 million on bids for projects with a capital value between A$250-300 million, rising to A$5-6 million for a A$1 billion hospital, and A$30 million or more for a large A$2 billion plus economic infrastructure project. It is possible that costs have been exaggerated, as KPMG appears to have relied on information provided by market participants without verifying it. The costs also include success fees paid to consortium members in the winning consortium.
While these costs may be significant in absolute terms, they equate to between 0.5-1.2% of project capital value (with the larger projects costing proportionately less), which is close to world's best practice. So Australian PPP bidding costs are certainly not excessive.
There is also little, if any, evidence that these bid costs are discouraging potential bidders from bidding to an extent which is materially affecting competition and, consequently, the value for money which Australian Governments are obtaining from PPP bidding processes.
Value for money drives higher bidding costs
The higher bidding costs of Australian PPPs, compared to those in Canada (best practice), are partly caused by the preference of Australian Government agencies for a high level of certainty on commercial terms before a sole preferred bidder is appointed.
Canadian procuring agencies, on the other hand, are prepared to leave more for negotiation after a sole preferred bidder has been selected. Consequently, further bidding stages involving requests for "best and final offers" are more common in Australia.
This driver of higher bidding costs is a consequence of the strong emphasis in Australia on achieving best value for money for government. The adoption of certain strategies used in Canada that have reduced procurement periods and bid costs – such as deferring the negotiation of commercial terms, and the development of concept designs, until after the appointment of a sole preferred bidder – would undoubtedly reduce the value for money outcomes which have been achieved on Australian PPPs by completing these tasks within a competitive environment.
Even though the additional bidding costs, including losing bidder costs, are ultimately borne by government in the form of higher contract prices, the additional value which government achieves by finalising the key drivers of value for money in a competitive environment would almost certainly exceed the additional bidding costs. Indeed, governments sometimes consider it appropriate to return some of this value to the losing bidders that generate it, by reimbursing a portion of their bid costs.
Of course, there is no case for continuing parallel negotiations with multiple bidders once it becomes certain that a clear leader has emerged. Stalking horses are neither appropriate nor fair.
Strategies for reducing bidding costs
Strategies which governments can adopt to reduce bidding costs, which would not affect value for money, include:
- avoiding premature project announcements, and allowing sufficient time for pre-tender phase preparation;
- adopting a sensible procurement timetable, and sticking to it;
- only issuing the request for detailed proposals once all necessary preparatory work has been completed, thereby minimising the need for addenda and re-bids;
- ensuring the government project team is resourced with highly capable people;
- adopting a clear and effective governance structure to facilitate quick decision-making on the government side;
- interacting effectively with bidders during the tender process, consistent with appropriate probity arrangements;
- not asking bidders to provide information which isn't needed to evaluate their capability, or to achieve certainty on commercial terms prior to the appointment of a sole preferred bidder;
- reducing the amount of bid phase design work required from bidders, and instead placing greater reliance on the project contract requirements, including fitness for purpose warranties, the requirements of the performance specification (including minimum architectural outcomes) and the payment and abatement mechanism; and
- conducting due diligence investigations (eg. geotechnical, contamination, heritage) for the benefit of all bidders, where this is more efficient.