An augmentation is a type of modification to an existing PPP, which involves procuring from an incumbent Project Company significant additional infrastructure or services that will become an integral part of the PPP as a whole. For example:
• additional rail line for a further phase of a heavy rail, metro, or light rail system; and
• an extension to a school or additional school in a 'portfolio of schools' PPP
These could be either a modification or augmentation (as contemplated by the Project Deed), or could warrant a new procurement process.
An augmentation will fall outside the scope of the Responsible Agency's power to order modifications in the Project Deed. It is a variation process established on pre-agreed principles in the existing Project Deed with the incumbent, for example:
• that a Project Company will competitively tender all components of its scope of work (other than agreed, non-contestable components and Operations & Maintenance (O&M) services)
• fixed priced options (subject to escalation and specified event adjustments)
• desired timeframes for the delivery of the augmentation; and
• O&M target price, although this can vary from project to project.
Reasons for an augmentation, rather than engaging in a new procurement process, may be:
• if there is significant benefit in retaining the incumbent Project Company to construct and operate the augmented infrastructure; or
• the risks to ongoing operations and interfaces are considered so high such that an augmentation approach will outweigh any benefits delivered by full contestability associated with a new procurement process9.
The NSW Government must ensure value for money and competitive outcomes as part of the augmentation negotiation process. Various augmentation precedent transactions exist and the most appropriate approach should be considered and adapted on a project by project basis. Augmentation regimes should not be used if a typical deed-based approach to modifications is appropriate.
In addition to sub-section 4.7.2.1, above, when materially varying an existing PPP with an incumbent Project Company (or part thereof) through an augmentation process, the Responsible Agency should:
• invest significant time in establishing a Negotiation Plan and strategic objectives at the start of the augmentation procurement process to guide the process, scope and risk allocation, and to test the success of outcomes achieved
• adopt early, open, and collaborative communications and stakeholder engagement (internally with Government stakeholders, and externally with the incumbent)
• develop a schedule that includes an option to pursue an alternative procurement, including but not limited to termination of the existing PPP and retendering the relevant scope, should the success of an augmentation process prove unlikely. A viable alternative procurement strategy to the direct negotiation with the incumbent Project Company must be developed and maintained, which Government may exercise at its discretion
• follow the original project risk allocation with any changes made as a result of specific project/ scope changes
• consider flexibility and financing arrangements, including implications of longer debt tenor in the PPP vehicle and hedging and swap costs, in consultation with NSW Treasury and TCorp as soon as practicable prior to RFP (or the refinancing), and/or partial termination of certain contracts (for example, operations)
• provide guidance on capital expenditure to the incumbent early in the procurement process, which requires consideration of benchmarking and independent cost estimation to manage price expectations
• ensure the integrity and credibility of the value- for-money benchmark by dedicating appropriate resourcing; and
• ensure project deadlines are meaningful and realistic, and take into account the option to pursue alternative procurement of the new scope if the augmentation does not proceed.
If appropriate, Responsible Agencies should include in the RFP a definition of augmentation requirements to ensure bidders (including key subcontractors) consider future augmentation(s) when developing technical and commercial solutions. This will also enable the Responsible Agency to obtain:
• a clear definition of contestable and non-contestable augmentation packages
• to the extent possible, option pricing for non-contestable packages; and
• a commitment to an open book process.
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9 Note: Clause 15(e) of the PBD 2019-05 authorises additional delivery of goods and services where a change of supplier cannot be made for technical reasons. Clause 15(i) of the PBD 2019-05 authorises additional construction services up to 50% of the original contract value where the services are required due to unforeseeable circumstances.