Market testing involves the private party conducting a competitive tender for the performance of the reviewable services for the next reviewable services term. The successful tenderer will provide the services as a subcontractor to the private party for the next reviewable services term.
The project deed will typically provide for the government party and the private party to agree the procedures for market testing, but it will be the private party that undertakes (at its cost and risk) the market testing. The government party has the right to observe the process. The contract director must ensure that the process is run in a manner consistent with good procurement practices to ensure transparency and a value for money outcome.
The incumbent subcontractor has a significant advantage in the tender process, having delivered the existing services and possessing a strong understanding of the project. Other service providers competing in the market testing process may have strong service delivery capability and efficient businesses, but will not have such a strong understanding of the specific project and may price in a risk premium to account for their lack of detailed knowledge of the project. To ensure a strong competitive outcome, the process should be structured to address this information asymmetry by making as much relevant and useful information available as possible.
In some projects, the private party may be required to obtain approval from its financiers to replace a subcontractor. In these cases, it is advisable for the both parties to engage with the financiers prior to conducting the competitive tender to ensure that the financiers' requirements are addressed through the process.