An issue raised by many witnesses and in submissions to the inquiry concerned the high cost of organising bids for PPP projects. This is not a situation unique to Victoria, occurring in most other jurisdictions.
It was pointed out to the Committee that PPP tendering costs are far greater than the average tender costs of other procurement methods, and this remains true no matter what the project size.
One reason for the higher cost of tendering for PPP projects is that the time taken between offering the project to the public sector and the final signing of the deal can be protracted, especially for particularly intricate and technical projects. The average time taken to complete PPP deals ranges from 11.5 months to 20.5 months (exhibit 7.2).
Exhibit 7.2: Various PPP projects - procurement periods
| Project | Expressions of interest | Signing of contract | Time (months) |
| Royal Women's Hospital | 6 November 2003299 | 11 April 2005300 | 17 |
| Convention Centre | 5 October 2004301 | 10 March 2006 | 17 |
| EastLink | 1 May 2003302 | 14 October 2004303 | 17 |
| Showgrounds | Announced 2 October 2003304 | 22 June 2005305 | 20.5 |
| Southern Cross Station | 19 July 2001306 | 2 July 2002307 | 11.5 |
Private consortia tendering for PPPs expend significant amounts of money developing project proposals, tendering for the project, and negotiating the complex legal and financial structures for the project.
The successful consortium for the CityLink project spent $28 million tendering for the project to financial close. Tendering for the EastLink project is claimed to have cost $30 million.308 This is not unusual as was highlighted by a Baulderstone Hornibrook director, who told the Committee that in tendering for the New South Wales schools project:309
We made an estimate of our proposal for the schools project - [it consists of] somewhere between 3,600 and 4,000 pages, and every word and every clause has to be consistent and linked and integrated - and it is a challenge. We are spending heaps of money, our competitor is spending heaps of money, and the Department of Education is spending heaps of money.
He also indicated that the high transaction costs discouraged some companies from submitting tenders. They were also a factor in increasing the required rate of return sought by companies on PPP projects, as they seek to recover the expenditure lost with unsuccessful tenders.310
The Committee is aware that government also incurs significant ongoing service monitoring and contract management costs. These high transaction costs mean that the PPP model will rarely be appropriate for small projects.
To ensure a unified approach to risk transfer and to reduce procurement times and costs, the United Kingdom Government is using standardised contract documentation.311
The Committee understands that most state governments are moving towards consistent tendering and contract negotiation procedures in an attempt to reduce transaction costs.
The Department of Treasury and Finance has also sought comments from major industry groups about possible actions to reduce transaction costs. This is discussed in further detail in Chapter 4.
The Committee recommends that:
| Recommendation 16: | The Victorian Auditor-General periodically undertake performance audits of all major public private partnership projects to determine whether value for money is being maintained over the life of a project. | ||
| Recommendation 17: | The value for money tools used for Partnerships Victoria assessment be revised to include: | ||
| (a) benchmarked comparisons where these are possible; | |||
| (b) a full range of alternative funding options (including public sector funding through the budget); | |||
| (c) an indication of the accuracy of the public sector comparator; | |||
| (d) a precise definition of the traditional public sector alternative option under consideration; and | |||
| (e) a publicly available explanation of how the public sector comparator is used to compare tender bids. | |||
| Recommendation 18: | An independent assessment be made of the relative cost performance, efficiency and timeliness of all privately funded projects, similar to the Mott MacDonald (United Kingdom) report. | ||
| Recommendation 19: | The Victorian Government make representations to the National PPP Council to arrange for an independent study into the size, structure and competitiveness of the Australian public private partnership market to determine the degree to which its diversity is sufficient to be fully competitive. |
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299 Department of Human Services, Royal Women's Hospital Redevelopment Project, www.tenders.vic.gov.au, accessed 2 October 2006
300 Department of Treasury and Finance, Financial Report for the State of Victoria 2004-05, p.212
301 Department of Infrastructure, Melbourne Convention Centre Development Project, www.tenders.vic.gov.au, accessed 2 October 2006
302 Conversation, SEITA, Mr Michel De Vries, 25 July 2006
303 Department of Treasury and Finance, Financial Report for the State of Victoria 2004-05, p.212
304 Hon. R Cameron, MP, Minister for Agriculture, media release, 'Roll up, Roll up - Bids called for Showgrounds upgrade', 2 October 2003
305 Department of Treasury and Finance, Financial Report for the State of Victoria 2004-05, p.212
306 Conversation, Mr Tony Canavan, Spencer Street Station Authority, 25 July 2006
307 Department of Treasury and Finance, Financial Report for the State of Victoria, 2002-03, p.179
308 A Keenan, 'Call to streamline tender bids', The Age newspaper, 3 November 2004, p.9
309 Mr R Opiat, Director, Business Development, Baulderstone Hornibrook, transcript of evidence, p.183
310 ibid.
311 HM Treasury (UK), PFI: Strengthening long term partnerships, March 2006, p.4