At the recent G-20 Finance Ministers and Central Banks Governors’ meeting in Cairns in September 2014, the OECD made mention of new innovative approaches such as the proposed “Inverted Bid Model”, and “asset recycling” that has been adopted in Australia, in the development of new ways of funnelling financing into infrastructure projects.
The OECD is developing a taxonomy outlining the options and instruments available to institutional investors for investing in infrastructure. There is a focus on new forms of investment such as partnerships between banks and institutional investors, risk mitigation mechanisms, and new procurement/bidding models to reduce bid costs.
In Australia, the Inverted Bid Model is an example of an innovative new bidding model that has been specifically designed to support long term equity investors (such as superannuation funds) investing in infrastructure projects. It was developed recently by Industry Super Australia (ISA) in conjunction with the Complex Program Group to support alignment of longer term equity investors investing in infrastructure projects.
Under the Inverted Bid Model, the traditional bidding process is in effect reversed through a two stage bid process in which the government will identify and select its preferred equity partner first on the basis of the bidder with the most competitive IRR, and then there will be separate tenders for the construction, operation and maintenance elements and debt funding required for the project.
The Inverted Bid Model is an attempt to level the playing field for genuine long term equity investors, who seek to make a reasonable return over the life of an asset by investing over the longer term to improve services and facilities to meet demand (and not shorter term returns through the initial bid structuring and asset construction).
The model is intended to address the issues that can arise under the current PPP model in respect of short-term bidders building long-term infrastructure. Click here to view a diagram showing the current model versus the Inverted Bid Model.
Some of the current criticisms with the current procurement approach include:
- High bid costs and long procurement timeframes creating barriers to competition
- Refinancing risks
- Poor value for money
- High whole-of-life transaction costs
According to ISA, if the Inverted Bid Model is adopted, bid costs can be expected to fall from 1.5% to 0.8% of the total value of the project, and procurement lead times can be reduced from 17 months to 12 months. Given such potential benefits, the Inverted Bid Model warrants close consideration.