Establishing the alliance delivery method is a complex commercial transaction.51, 98
In the context of alliancing, public officials are accountable for ensuring that the alliance is delivering public value in line with duly authorised approvals (e.g. the business case VfM proposition). There are a number of publications that clearly note that public officials are required to work in the public interest; for example, the Victorian Public Administration Act 2004. This accountability cannot be outsourced to the alliance but must remain with the public officials.
The Owner must ensure that public value is being delivered by independently assessing and verifying that the commercial transaction is in the benefit of public interest and optimises VfM as articulated in the business case.
In particular, the selection of NOPs using solely non-price criteria requires a much higher degree of commercial engagement by Owners compared to traditional (competitive) procurement because of the need to negotiate a wide range of commercial parameters that would normally be tendered by suppliers (NOPs), particularly the TOC. Some of these parameters include75, 98:
• Profit margins.
• Business as usual components of branch and corporate overheads.
• Insurances (public liability, construction, professional indemnity).
• Ensuring that alliance objectives reflect business case objectives.
• Aligning Owner and NOP commercial requirements.
• Negotiating the TOC.
• Commercial framework including pain/gain split and extent of any cap on gainshare.
• Ensuring that any incentives only reflects outstanding outcomes (not normal business improvement).
• Risk, contingency and opportunities assessment.
In negotiating with NOPs on areas such as those above, there is potential for serious asymmetry of commercial capability and capacity between public sector officials and private sector employees, and their respective senior executives, for many of whom such commercial engagement has been their livelihood. Such asymmetry would negatively impact VfM.
The commercial engagement of the Owner during the establishment of the TOC is particularly problematic. The alliance has not fully formed at this stage as the fundamental principle of commercial alignment is not in place and there is an inherent commercial tension between the NOPs and the Owner: NOPs naturally seek a higher TOC and Owners a lower. This is exacerbated if there is a misunderstanding that the discussions surrounding the TOC at this time are occurring under the auspices of alliance principles (good faith, best for project, collective assumption of risk etc) rather than a normal position based commercial negotiation. This situation is common as a result of different forms of interim alliance agreements that exist in the Australian market.
The reality of TOC establishment is that, notwithstanding the aspiration to select integrated project team resources on a best for project basis from the alliance participant organisations, the primary role influencing VfM at the TOC development phase will (ordinarily) be filled by the NOPs (e.g. Alliance Manager, TOC Development Manager, Design Manager, Construction Manager, Commercial Manager). This has the potential for both information and commercial asymmetry for Owners. This may by compounded by the various 'agree-to-agree' clauses that reflect the incomplete nature of many alliance agreements. This situation has been identified as creating information asymmetries that may place greater bargaining advantage with one or more parties.88
Owners also need to recognise that under an alliance they have agreed to share project risks (and opportunities) and therefore must maintain active commercial engagement throughout the life of the project and that the commercial engagement does not cease on agreeing the TOC or signing the PAA. Firstly, there are generally a significant number of commercial 'agree to agree' clauses mentioned previously; secondly, the alliance ALT will require and expect the Owner to actively participate in a large number of commercial decisions for the life of the project. It is in both the Owner's and NOP's interests that the Owner brings appropriate commercial expertise and authority to the alliance, rather than play a passive role in commercial decisions on the alliance.
It was observed that both the practice of alliancing and commercial asymmetry are not uniform across the various Owners and asymmetry will not be a serious issue in every case.
In short, asymmetry of Owner resources, requisite expertise, information and therefore knowledge in the commercial aspects of the alliance has the potential for significant erosion of VfM on the individual alliance.
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Discussion Point 5 - Asymmetry of commercial resources and capability Alliances require commercially complex transactions. The TOC development phase has high potential to influence VfM outcomes. During this phase there is fundamental commercial misalignment between Owner and NOPs. Owners (in the public sector) may be exposed to serious asymmetry of resources, information, and commercial capability in their commercial engagement with the NOPs particularly during the critical TOC development phase. This asymmetry has the potential for significant erosion of VfM. |