The following section provides a high-level summary of approaches adopted by key international jurisdictions to address some of the key issues raised by the Australian market participants in respect of procurement inefficiencies.
Magnitude of external bid costs
There is a widespread perception that PPPs are associated with "high" bid costs in comparison with other forms of procurement, representing a hurdle for potential bidders to enter the bidding process, which, in turn may undermine competition. However, there is a lack of appropriate data to analyse the level of bid costs incurred by the public and private sectors, the drivers for bid costs and the make-up of bid costs in PPP projects. There is limited publicly available information, it mostly being confidential and with limited identification and allocation of in-house costs - both for the public and private sectors.
A study by the Major Contractors Group in 2005 found that, in the UK:16
• the winning bidders' bid costs (as a percentage of capital value) are about 5% - 6% of an average project value of US$150 million
• from a sector perspective, the winning bidder's bid costs are about 4% of the project's capital value (US$20.5m) for a hospital project, where project values tend to be large; 6% (US$4.3m) for a school project; and 3% for a road project, also where project sizes tend to be large.
• each failed bidder spends about 2.5 - 3% (50% that of the winning bidder) on external bid costs.
The more recent introduction in the EU of the Competitive Dialogue procurement process has increased the time and cost to bid, as it requires the finalisation of bids (albeit without committed funding) before selection of a preferred bidder, with no subsequent negotiation.17
In Canada18, the "at risk" external costs of bidding are about 0.35 - 1.0%.
As many PPP players are competing in projects worldwide, Canadian governments view their policies of providing an honorarium (partial cost reimbursement) to bidders as potentially a deciding factor in whether a company bids on a Canadian PPP project at all.
The table below provides a comparison of bid costs between the UK, Canada and Australia.
Private sectors bid costs (as a % of capital value) | UK | Canada | Australia |
Average project value | US$150m | C$350m | A$250m |
Winning bidder | 5-6% | 0.5-1.5% | 1-2% |
Each failed bidder | 2-3% | 0.35-1.0% | 0.8-1.2% |
Source: KPMG research |
|
|
|
Bid costs spent by failed bidders, as a percentage of total capital value, appear to be lower than those in the UK (assuming that they spend 50% - 70% on the first full submission), but higher than those in Canada. A like-for-like comparison between countries is difficult, due to limited information, substantial variability in bid costs as a proportion of capital costs, and partly because Australia generally undertakes larger projects than do the UK and Canada. However, comparing projects with broadly similar sizes, Australian bid costs are perhaps 25 - 45% higher than those in Canada.
The main sources of the lower bid costs in Canada than in Australia cited by Participants are:
• less of a focus on design, particularly architectural design
• less information and less design development required within bids
• greater standardisation of contracts, with contracts being rolled forward to subsequent projects without substantive amendment
• less focus on third party income or development gains
• less use of further bid stages.
Although noting these factors, Australian Governments value their emphasis in PPP projects on design (including operational efficiency) and potential third party income as key sources of wider value for money, so some of these strategies are not appropriate for Australia.
In comparison, a 2008 EIB report19 indicated that the PPP bid costs for the winning bidder in European Countries using the Competitive Dialogue procurement process is c. 2.54% of the capital value of a project (though they based this analysis on a project with a significantly lower capital value of €200 million).
Many international jurisdictions have a form of bid cost reimbursement. Examples include.
• Canada, where there is a growing trend in some Provinces to pay an honorarium to losing bidders, as noted above, demonstrating commitment on the part of the procuring authority, and as an acknowledgement of the substantial costs associated in bidding, particularly in the design and legal components of bids. These honoraria typically are a third to a half of losing bidders' total external bid costs, and so are significant
• Portugal, which has also adopted a practice of paying a "fee" to unsuccessful bidders in order to maintain and attract investment in an emerging market. The Government has reimbursed bid costs on its High-Speed Line project to increase competition and to attract players that were unfamiliar with this type of project in the Portuguese market
• France, where the Government often reimburses a portion of bid costs to unsuccessful bidders, depending on the extent to which they participate in the competitive dialogue procedure and the detail of their offer. The level of reimbursement can reach 40% of design cost for the initial bid phase and 70% for the final phase.
The UK Department of Health is considering using exemplar designs on major PPP health schemes, in preference to paying the losing bidder's costs.
__________________________________________________________________________________
16 Source: A study by the European Investment Bank (EIB) in 2005 analysing the key determinants of bid costs and a survey carried out by the UK Major Contractors Group (MCG) in 2005
17 Source: KPMG research
18 Source: KPMG research and quote from Jim King, SVP Finance, EllisDon Construction in "The Debate over PPP Honoraria", Daily Commercial News online, 27 November, 2006
19 Source: Transaction Costs in PPP Transport Infrastructure Projects: Comparing Procurement Procedures EIB University Research Sponsorship Programme. Authors: Antonio Sánchez Soliño Associate Professor. Universidad Politécnica de Madrid Pilar Gago de Santos Researcher. Universidad Politécnica de Madrid (dated November 19, 2008)