As noted above, we recommend that Governments minimise the quantum of bid costs by implementing a range of strategies to reduce inefficiency, including:
• employing and retaining high quality people, in particular the project director and key team members responsible for managing each of the various disciplines
• having good governance structures that enable effective and efficient decision making
• rationalising the information requested from bidders.
However, even after successfully implementing appropriate strategies to minimise potential inefficiencies, bid costs incurred on major infrastructure projects delivered using the PPP procurement model will continue to be significant due to this model's inherent level of complexity.
Arguably, Governments currently are paying for the bid costs of established participants through their including bid cost multiples within the projects that they successfully close and /or requiring high equity returns and profit margins on services provided. Given this situation, an obvious question is whether Governments should simply directly provide a significant contribution to bidders' reasonable costs incurred as part of the bidding process, to maximise competition and hence to prevent bid costs from being a key barrier to competition within the Australian PPP market.
However, providing such substantial contributions routinely could have major consequences, such that Governments may not want this measure as a standard position. In particular, they may result in a change to the structure of the Australian PPP market. When compared with other international jurisdictions, financial institutions prepared to provide risk capital have typically dominated the Australian sponsor market (specialist PPP firms have generally originated from investment banking teams). Internationally, construction companies and operators more often lead bidding consortia, depending on the type of project and the level of diversification of construction companies into operations and maintenance. Consequently, routinely providing a significant contribution to bid costs could have extensive consequences on the make-up of consortia.
When considering any change to standard approaches in respect of bid cost contributions, Governments should also consider the potential for sponsors within the existing market to spend additional total monies on bidding, adding to the magnitude of total bid costs.
BB. Although we do not recommend that Governments make substantial contributions towards reasonable costs as a standard position, we recommended that, if they do not already do so, they do consider a substantial contribution in instances where:
• they need to attract new entrants to the Australian market (i.e. specialist technology providers, specialist operators, etc.)
• they extend procurement processes beyond the norm in order to achieve maximum competition and best value for money outcomes
• projects are essentially 'one off in nature or so large as to prevent bidders from being reasonably able to recoup those costs on future successful transactions
• they cancel the project for reasons other than bidders' failure to make acceptable proposals (when they should provide full reimbursement).
Australian Governments follow these practices already, but not consistently.
Governments should state upfront the circumstances under which they will contribute towards bid costs and the basis for determining a "reasonable" level of contribution.
Finally, from the perspective of barriers to competition, the bid cost issue is much less significant where there is an appropriate pipeline. However, even where an appropriate pipeline exists, excessive bid costs still remain a key issue for Governments to address, due to their direct influence on the value for money achieved by Governments.