CORPORATE FINANCE

PPP in New Zealand:

Getting the procurement model right
March 2010 ADVISORY

The March 2010 National Infrastructure Plan raises

the prospect of greater private sector participation
in the delivery of public infrastructure and services
in New Zealand. As a contribution to that thinking,
the following KPMG white paper examines some
key considerations in structuring a procurement
process with competitive selection of a private
sector partner.
It is becoming increasingly recognised that the private sector can play an
important role in the delivery of national and local infrastructure. Crucial to the
success of private sector participation is structuring a selection process that fully
realises the benefits of increased competition and drives innovation, while at the
same time keeps transaction costs for both the public and private sectors to a
minimum.
In a developing New Zealand market, being able to instil confidence in the private
sector regarding the public sector’s ability to run a selection process proficiently
is paramount to encourage existing private sector players to gear up and
encourage new players to come to New Zealand.
This paper looks at the key considerations in structuring a procurement process,
with a focus on the comparison between the interactive tendering models
frequently used in Australia and the Competitive Dialogue model enforced in
Europe. These models share common features, but also have crucial differences.
The challenge in New Zealand will be finding the model and approach that fits our
unique set of circumstances best.

Adrian Wimmers
Head of Infrastructure Gwyn Llewelyn
and Projects Group Associate Director
+64 4 816 4681 +64 4 816 4680
awimmers@kpmg.co.nz gwynllewelyn@kpmg.co.nz
A comparison of Australian and European procurement processes
Criteria
Extent of interaction and dialogue
with bidders
Extent of design and FM service
development pre single bidder
selection.
Extent of changes post single
bidder selection
Stages of procurement
From a private sector perspective the
main concern is usually the extent
of costs which are incurred while
still in competition and the degree
of certainty that can be offered
around project timings. The following
paragraphs discuss in more detail
some of the key issues which impact
upon these.
An interactive process
with open dialogue
One of the important shared
characteristics of successful
procurements around the globe is the
encouragement of healthy dialogue
between the public and private sectors
during the procurement and prior to
the receipt of tenders. At a base level
the benefits of this seem self evident
– the mutual understanding of both
parties’ requirements. The private
sector has the opportunity to clarify
and clearly understand the public
sector requirements, and the public
sector gets a real understanding of the
Australian models
Parallel dialogue may occur between
each bidder and the authority from the
issuing of tender requirements to the
receipt of responses.
Detailed design and service solutions
are submitted as part of the tender
process. However, a substantial level
of design development is expected to
occur post selection of preferred bidder
and post achievement of Financial
Close. All, or the substantial majority
of, commercial and pricing issues are
usually agreed as part of the tender
whilst still in competition.
Flexibility is allowed to develop solutions
further post the preferred bidder
selection. Generally, pricing is not
materially altered.
Often not predetermined, with the
clear message to the private sector
that if a strong value for money solution
is submitted within the first round of
bidding then the procurement can be
moved to a single bidder stage quickly.
solution proposed by the private sector
including price, scope and risk transfer.
If the aim is to deliver long-term
successful partnerships, it is essential
for all organisations to understand fully
what each party is offering.
If this dialogue is run effectively and
efficiently, it has the potential to have
a positive impact and ensure benefits
can be realised by both parties. Whilst
the public sector is often regarded as
being the client in such procurements,
it will be a partner throughout the
concession. Having input into the
design and service development
process is a requirement of a
successful partnership. Well managed
dialogue provides early relationship
building necessary to enable a
successful partnership to operate
after contract award. The nature of the
relationship during that stage is often
an early indication of ‘fit’.
Bidders are given the opportunity to
respond to public sector feedback,
revise submissions and develop them,
EU Competitive dialogue
Dialogue is allowed with shortlisted
suppliers to identify and define
solutions to meet the needs and
requirements of the contracting
authority, effectively the same as the
Australian models.
All aspects of the tender are
developed to a very advanced stage
prior to the selection of the preferred
bidder, certainly those relating to price
and risk. Typically designs are at a
level where full planning applications
can be submitted on preferred bidder
selection with a very short preferred
bidder period.
There are explicit rules on post-
tender discussion which are limited
to clarifying, specifying and fine
tuning of proposals, and provision
additional information provided this
doesn’t change the basic features of
the tender. The knock on effect from
this is that the scope for changing
solutions once a single bidder has
been selected is vastly reduced.
There is flexibility but frequently
dialogue is conducted in successive
stages, with the aim of reducing the
number of solutions/bidders at each
stage. The number of stages and
timescales for each are ordinarily
communicated in advance to bidders.
whilst retaining a reasonable scope for
flexibility in discussions with bidders to
allow innovation. Although bidders may
adopt markedly different approaches
to developing a solution that meets
the government’s requirements, the
increased contact with government
generally leads to a very high level
of conformity with requirements and
thus substantially mitigates the risk of
outstanding issues post evaluation of
tenders.
Probity advisers offer
independence
Despite this, the use of interactive
dialogue is not without its detractors.
The private sector are frequently
quoted as worrying that the discussion
process tends to narrow the gap
between bidders. The perceived risk
is that the public sector may wish
to cherry pick good items from each
bidder to develop their preferred
solution, eroding any competitive
advantage a bidder may have and
removing any ability to generate
clear water over another bidder. It
is therefore essential that the public
sector recognises what is and is not
commercially confidential, and retains
the confidence of bidders that it will
not transfer ideas between the bidders.
The processes used must be
transparent and able to withstand
internal and external scrutiny. This can
be aided by the use of an independent
and external probity adviser. An probity
adviser will scrutinise the procurement
process and advise whether it is
equitable and conducted with integrity.
Another potential risk is that if there
are definitive views of the ‘best’
solution held by the public sector,
innovation can be stifled. This risk can
be exacerbated if the public sector has
undertaken a substantial amount of
design or service solution development
before going to market – the risk is
that the public sector has already
decided what it wants and is merely
looking for someone to provide it at
a low price. This does not sit well
with the underlying principle of PPP,
which measures outputs and allows an
innovative ‘fresh thinking’ approach to
how these outputs are achieved.
Open and frequent dialogue is
undoubtedly a good thing to be
encouraged, but it must be conducted
in a structured way, mindful of probity
principles, to encourage innovation and
retain the confidence of bidders.
Need for clear defined
requirements
Another common principle which
is almost universally accepted,
although often not universally applied,
is the need for the public sector
to understand their requirements
fully before a project comes to
market, and to communicate these
requirements clearly and openly to
the private sector. It is important
that sufficient time and expertise are
invested in the development of robust
and clearly defined requirements,
and governments should resist the
temptation to bring projects to market
too early.
Well developed requirements will avoid
wasted effort and promote healthy
procurement competition, as well
as reduce procurement timetables
– the extra investment upfront will
pay dividends later. Bidders incur
considerable time and money on the
bidding process, and poorly structured
requirements, lack of clarity about
the hurdles to be met, or subsequent
amendments to the requirements are
likely to draw criticism and adversely
affect the timeframes.
As well as clear project requirements,
the market will react positively to clear
signposting of what is to be done
at what stage, and crucially, what
must be resolved before a preferred
bidder is selected. This is assisted
by standardisation of procurement
process and documents across
projects.
Restrictions of
government changes
to requirements
The need for well defined
requirements is universally accepted,
however, being tied to these
requirements in the face of changing
circumstances in order to comply with
inflexible procurement legislation can
equally provide a motivation for the
public sector to be deliberately vague.
Some flexibility has value. The common
sense argument would indicate that an
inflexible approach, (which limits the
ability to change requirements as the
procurement progresses) is unlikely
to lead to a better solution for either
side of the deal. That is not to say
the public sector should change their
requirements at every whim – any
change to requirements should be
interrogated and weighed up against
the adverse impact it may have on
the bidding costs of the private sector
and levels of market confidence in the
public sector. However, the degree
of restrictions placed on procuring
authorities in this regard does differ
across the globe.
The EU procurement
model
The EU procurement legislation
is particularly restrictive. Whether
as a consequence of the inherent
cautiousness of the legal profession,
or as an understandable reaction to
evermore litigious times, the practice
has been to interpret the scope to
change the requirements of the public
sector in a very restrictive manner
once procurement has begun. There is
evidence of this in scenarios where (as
a result of the Global Financial Crisis
and the increased cost of projects) the
authority is required to de-scope the
project to make it affordable. Even in
circumstances where this would be
beneficial to both an authority and the
private sector, given a scaled down
project may be better than no project
at all, we have seen the hands of
authorities tied by the legal profession’s
interpretation of legislation. This has
prevented authorities from making
changes to scope which are any more
than fine tuning. The result is stalled
procurements and, in some cases,
projects being abandoned for fear of a
challenge from a previously deselected
bidder. This degree of cautiousness
although understandable, benefits
no-one.
The pragmatic Australian
procurement model
The Australian model is a more
pragmatic one, where the general
principle is a bidder is selected
based on the best bid at that place
in time. The solution is then able
to be enhanced in a single bidder
environment if this will increase the
value for money of the solution.
Furthermore, should requirements
change during the procurement then
the authority generally has scope
to change requirements to suit. In
our view, this flexibility has certainly
benefited projects during recent
turbulent financial times.
Extent of development
prior to single bidder
selection: Benefits of
competition versus
increased costs
Perhaps the most contentious of
issues for any procurement is the
extent to which solutions must be
developed prior to the selection
of a single bidder, whilst still in
competition. There is a clear trade off
between the benefits of increased
authority negotiation strength and the
development of multiple solutions, and
the fact that having multiple bidders
develop solutions and undertake
detailed negotiations is inherently
expensive for both the public and
private sector.
The Competitive Dialogue procedure
introduced in 2006 in the EU continues
to provoke controversy. Many bidders
see it as leading to further increases
in the already high procurement
costs of PPPs, rendering them slow,
expensive and resource intensive. At
kpmg.co.nz
best, this cost is passed back over
time to the public sector through risk
pricing by the private sector. Worse
still is the prospect that the bid cost
and corresponding risk is prohibitive
and will deter proficient bidders from
the market. The extra procurement
cost is not just restricted to the private
sector – the concurrent negotiations
with multiple bidders is, also resource
and adviser intensive for the public
sector. It is important to remember
that any pricing gain achieved through
an increased competitive process must
be offset against the extra bid costs
and time incurred.
The EU Competitive Dialogue
procedure was brought in to combat
the potentially anti-competitive abuse
of the negotiated procedure used in
early PPP deals - the deal at financial
close often differed dramatically from
that upon which single bidder selection
was made. However the Australian
market has not resorted to such
restrictive measures and therefore
there may be more flexible means to
the same end.
Bidder complaints can perhaps
be understood by considering the
difference between the extent of
negotiations which are required
for authorities to be able to fairly
differentiate between the bidders for
the purposes of evaluating bids, and
the extent of negotiations that are
needed to provide certainty to the
public sector about their position being
unwound once the competition has
disappeared.
Point of
Point of
negotiated
evaluation
certainty
Time Stalking horse
period
Where the gap between the two is
significant then the private sector will
voice concerns of unnecessary cost,
and one bidder being used merely as a
stalking horse to give the appearance
of competition to the other. The EU
has certainly moved the point of
single bidder selection much further
to the right and perhaps created some
private sector unease. Many may
feel that there is an element of over
cautiousness by the public sector,
de-risking the procurement too far
which tips the balance away from
optimum value for money.
Perhaps the sensible approach is for
the public sector to really understand
what the key decision making criteria
are, and what elements are significant
enough to impact upon the desired
outcomes of the project. These issues
must be negotiated and agreed before
to single bidder selection. Other
issues should be considered using a
cost benefit analysis, e.g. the cost of
negotiating with multiple bidders on
the detailed finish of a building through
to all fixtures and fittings is unlikely to
be recovered through any competitive
pressure on the bidding process. There
is never a perfect solution to this,
but a bit of pragmatism and depth of
experience goes a long way.
De-selection of bidders
The issue of bidder de-selection does
not just apply to the appointment of a
single bidder. The market capacity may
well mean that there are two or three
competent bidders who are capable of
providing the services being tendered.
However, caution must be exercised
in keeping every capable bidder in
the procurement as long as possible.
Any advantage from the increased
competition must be considered
alongside any de-motivation for the
private sector, increases to bid costs
and longer procurement times.
Perhaps the Australian model provides
good examples of where this process
has been well managed, where bidders
are clearly told at the initial bid round
that if they put in a compliant tender
first time around that demonstrates
strong value for money and meets
all the requirements then the public
sector can move to a single bidder
after just one round of bidding. This
puts ownership of the process into
the private sector's hands, which is
much more likely to result in good
first bids, while still retaining the
ability to continue negotiation with
multiple parties should bids not meet
the requirements. It’s in everyone’s
interest if the best bids are lodged at
the first opportunity. This can contrast
to scenarios in lengthier procurements
where the private sector knows
in advance that further rounds of
bidding are in the pipeline which can
encourage a motivation to shelve
issues until later in the process.
We would encourage the public sector
to be bold in deselecting potential
partners, but at the point of single
bidder selection retain the threat to
kick out the preferred bidder and go
back to another should they go back on
any of the key elements of their bid.
Conclusion
There is no 'one size fits all' approach
to procurement, with timing of bidder
de-selection and the move to a single
bidder being the most contentious
issue. However a flexible, structured
approach which encourages interactive
dialogue to develop solutions and
allows bidders to achieve a single
bidder status quickly, (if they meet
all of the requirements) is likely to
maintain market interest, and keep bid
costs down whilst ensuring effective
competition and will resulting in the
best value for money.
To discuss this topic further,
please contact:
Adrian Wimmers
Head of Infrastructure
and Projects Group
+64 4 816 4681
awimmers@kpmg.co.nz
or
Gwyn Llewelyn
Associate Director
+64 4 816 4680
gwynllewelyn@kpmg.co.nz
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and a member firm of the KPMG network of
independent member firms affiliated with KPMG
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