The following discussion provides a high-level summary of the responses provided by Participants in relation to the questions included within the discussion paper5 distributed prior to consultations.
Do you consider there are currently substantive barriers to entry within the Australian PPP market and, if so, what are they, and which element of the market do you consider most affected?
Most Participants (both private and public sector) feel that there is good competition within the Australian PPP market. Projects generally deliver strong financial value for money and Government project teams see strong competition between short-listed bidders. Frequently, more parties submit Expressions of Interest (EOIs) for projects than the number on the Government's proposed short-list. However, factors that impact the level of competition within the PPP market can affect existing Australian PPP players, as well as deter potential new domestic participants and experienced international participants from the Australian market.
The two most common issues identified as barriers to entry were:
• the largely unknown pipeline of projects, and their sporadic nature (almost all Participants mentioned this issue)
• the establishment costs of developing a team with the core competencies and specialist knowledge required to participate competitively in PPP projects (around a half).
Participants generally also considered the magnitude of bid costs and general complexity of bidding processes in the Australian PPP marketplace as a key deterrent for new entrants when compared with other international jurisdictions. Further, several international Participants consider that there is a preference by Governments for demonstrated local experience both at the State and national level, though Governments refute that there is any such preference and, indeed, encourage competition from international firms.
The sectors that Participants considered most impacted by barriers to entry include:
• the construction industry, in particular large-scale international contractors looking to take a sponsorship role and smaller sized, appropriately skilled national construction contractors without large balance sheets (mentioned by potential new entrants as well as by sponsors trying to bring in contractors new to PPPs)
• the superannuation industry (a majority)
• facilities management contractors (several)
• financial advisors (international and some domestic participants).
What do you consider are the key barriers to competition amongst existing PPP market participants?
Participants raised a range of issues, with the most common being:
• the certainty of procurement processes, in terms of meeting procurement milestones (most)
• the degree of commitment to the project within each of the various Australian jurisdictions (most).
A majority of Participants indicated that, due to the lack of a national pipeline and co-ordination of project release, where resource constraints exist, bidders will select projects in which to participate based on an initial assessment both of assumed chances of success and of best return on investment.
Although Participants often used a competitor assessment for each particular project to determine their chances of success, other major factors determining their decision to bid for a project are:
• the level of confidence in the efficiency of the procurement process of the Government concerned (and the associated level of bid costs)
• the degree of certainty that the Government concerned will go through with the procurement of the project.
Participants indicated significant historic variations across jurisdictions.
Participants raised a number of additional issues including:
• National pipeline - the most important factor from the perspective of all Participants is the total number of projects brought to market (if there are more projects, prospective bidders are able to take a more favourable view of initial set up costs, their ability to absorb or recover bid costs, and their ability to manage and plan resources). Participants also view the co-ordination of projects coming to market as important, but it is only a major issue where there are a limited number of projects and the pipeline is sporadic in nature (as is currently the case). This situation has resulted in Participants being unwilling to increase their teams to meet the demand requirements due to the risk of being unable to continue to carry such costs without a probable and transparent pipeline. There also is a heightened risk of some project sponsors withdrawing from this role.
• Current financial markets - due to the current restrictions on the availability of finance, including the current lack of activity within the capital markets (although there is some emergence in other countries) in the aftermath of the Global Financial Crisis, international debt financiers are requiring the presence of one of the domestic 'Big 4' within a consortium in order to obtain credit committee approval. As a result, there has been reduced competition from both:
- the ability of Sponsors to lock up two or more of the domestic 'Big 4' on an exclusive basis, resulting in a strategic bidding position that reduces the practical bidding field to no more than two players
- in many instances, the domestic banks demonstrating a preference to work in pairs and accordingly, within the current market, being able to create a secondary shortlist (even though Government has short listed three) based on criteria that may not coincide with those of the Government.
Some Participants also felt that Governments have sought as much comfort on funding as possible, by not short-listing consortia without a "traditional" investment bank financial advisor arguably capable of providing or underwriting debt and equity.
• Bid Costs - a majority of existing market participants have indicated that the level of bid costs remain a barrier to competition, particularly where there is a concern as to the level of commitment to proceed with the project as a PPP and the certainty of the procurement process (in terms of meeting procurement timelines). However, several active players in the PPP market indicated that bid costs are not a major factor inhibiting participation in the bidding process, provided there are both an appropriate pipeline of future projects and an efficient procurement process. This reduced concern is due to their factoring bid costs into future successful bids as a multiple of actual costs incurred for each particular project such that, when they are successful, they can recoup past bid costs.
What is the source of the barriers, e.g. Government policy, accepted practice, industry structure, etc.?
In relation to barriers to competition (both potential new entrants and competition amongst existing players) the key reasons cited as preventing competitive outcomes consisted of:
• Perceived lack of commitment to the PPP procurement model in some jurisdictions - with regard to bringing potential projects to market, as well as projects where there has been a previous commitment to a PPP delivery model. Participants indicated that:
- Governments do not procure as PPPs some projects that might be best suited to, or appropriate for, PPP procurement, possibly due to bureaucratic prejudices or public misconceptions regarding private delivery of public infrastructure. As a result, existing and potential market participants are less able to undertake a reliable assessment of the likely future pipeline of PPP projects.
- Governments' commitment to projects announced and/or processes that have already commenced sometimes is lacking.
• Inefficient decision making processes - protracted timeframes and excessive stop/start periods for Participants bidding on projects, resulting in inefficient allocation of resources and constraints on teams' capacity to bid for multiple projects, act to reduce market capacity and competition.
• Perceived dominance of Australia's construction industry - international Participants have indicated that they believe that the major Australian construction contractors have a dominant position in the Australian market that impacts on their ability to compete effectively.
What do you consider to be potential solutions to the abovementioned issues? Where you suggest potential solutions, please indicate which of these options are likely to be the most effective.
Industry Participants suggested a range of solutions in relation to the above issues, which included:
• greater leadership from within Governments in respect of projects that are appropriate for PPP procurement (including the development of communications strategies to address public perception issues and controversy surrounding the PPP procurement model), resulting in greater clarity and certainty of a project pipeline
• recruitment, development and retention of highly skilled and experienced Government teams, in particular the project director but also key team members managing the various disciplines required to undertake PPP procurement processes successfully
• appropriate governance structures to ensure timely and effective decision-making processes, in particular the project director and project team being appropriately empowered to make decisions, with streamlined approvals processes in instances where whole of Government decisions are required.
We note that each jurisdiction through COAG has committed to the National PPP Policy and Guidelines, which include criteria for determining whether a project should be a PPP.
To the extent that your organisation is active in international jurisdictions that have implemented initiatives that act to reduce barriers to competition, please comment on the relevance and likely success of such initiatives within the Australian context.
Most Participants with international experience quoted Canada as an exemplar jurisdiction in relation to encouraging maximum competition from the perspective of both new entrants and existing competitors. Participants recognise Canada as a country with a solid pipeline of deals, particularly in the healthcare, justice and roads sectors.
Like Australia, Canada has an international reputation for its efficient procurement process and its track record of getting transactions through the procurement process to financial close (with few projects experiencing delays in reaching financial close). Canada has been able to reduce the time from release of EOI to financial close over the last three years (from an average of about 18 months to 16 months)6.
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5 See Appendix.
6 KPMG has based this conclusion on an analysis it performed on a random sample of 15 projects from the Infrastructure Journal database.