Reducing Bid Costs for Outcome-Based Procurements in NSW Infrastructure and Structured Finance Unit: Partnering to Create Partnerships December 2015
1. Evolution of infrastructure procurement in NSW 2. Market consultation and outcomes 3. Response and implementation 4. Project Deed Evolution 2
1 Evolution of infrastructure procurement in NSW 3
Increased focus on outcome specification The NSW Government has evolved in its approach to infrastructure procurement from an input specified approach to an outcome specified approach Input specification of asset Input specification of asset + services Output specification of asset Specification of service outcomes Tightly defined Government requirements over scope and inputs into construction of asset Highest level of certainty as to resulting asset Greatest number of constraints on bidders Tightly defined Government requirements over scope and inputs into construction of asset Certainty over asset and minimum service standards Flexibility in using assets to deliver required services No definition of asset inputs Flexibility provided to bidder in optimising efficiency of inputs to achieve outputs Greatest level of flexibility to bidders Provides bidders with ability to be innovative in delivering service outcomes Designed to maximise service outcomes 4
Government objectives Certainty and best quality service outcomes are key drivers for the State Best service outcomes Innovation The process must allow innovation by bidders. Efficiency Procurement must encourage increased efficiency in service delivery Certainty Price certainty Agreed documentation & approved finance Selection of a delivery/operation partner Proponent certainty Certainty over which proponents are involved Execution certainty Certainty that there are no barriers to execution Contract certainty D&C and O&M contracts priced and fully financed 5
Current framework maximises certainty Appointment of a preferred bidder will only take place once certainty has been attained with respect to key project documents and financing, with competitive tension embedded throughout all selection and negotiation processes Agreed Financing & Documentation Preferred bidder not appointed until certainty over: Fully agreed legal documentation Locked in financing Delivery strategy Operations plan Auxiliary plans (e.g. Health & Safety) Selection process Governance Competitive tension maintained throughout process with consistent selection and assessment methodologies applied across all proponents Strong project governance framework incorporating project evaluation team, overseen by Steering Committee, and Cabinet. 6
2 Market consultation and outcomes 7
Introduction undertook a review of procurement processes, and sought targeted feedback from the PPP market on the recent procurement of projects in NSW. Strong delivery track record has a strong track record in helping agencies successfully procure and deliver major infrastructure and/or complex projects under the Public Private Partnership (PPP) model ISFU involvement In 2014, the Infrastructure and Structured Finance Unit (ISFU) assisted the NSW Government with closing five new infrastructure projects (see below) Seeking targeted feedback Following the wave of PPPs in 2014, the ISFU has sought targeted feedback from the PPP market on infrastructure procurement processes in Australia Improvements to PPP policies Findings are used to inform potential updates and improvements to its PPP policies, including opportunities to reduce the cost of bidding for PPP projects in NSW Stage 1A Strictly Confidential Limited for Distribution 8
Engagement Approach The ISFU invited 65 market participants to participate in the consultation process. Interviews were held with 48 participants across roles in and sectors of the PPP market Review of Procurement Processes 1 Review topical and thought leadership papers prepared by other institutions and advisors on the subject matter of PPP procurement and private sector bid costs; 2 Prepared a detailed questionnaire to identify key cost drivers, obtain cost breakdowns of bid costs incurred on recent projects and solicit feedback on other bid cost related issues; and 3 Undertake interviews with sponsors, investors, advisors, contractors and operators that participate in the PPP market Meetings Held Written Response 10 8 6 4 2 0 5 4 3 2 1 0 Equity Equity/Other FAs Banks Contractors Operators Legal Accounting Other Equity Equity/Other FAs Banks Contractors Operators Legal Accounting Other 9
Key Cost Drivers Proportion of bid costs incurred by phase Market sounding & EOI Majority of bid costs are incurred during 20% 5% RFP phase the RFP phase 10% Post RFP Q&A / negotiations 65% Preferred Bidder Deal complexity Level of certainty Length of the procurement process Government Project Team Deal complexity typically resulting in longer and more intense procurement phases, often resulting in detailed clarifications after bid submission, with a requirement to allocate additional resources to resolve complex issues; The level of certainty required by Government before it appoints a Preferred Bidder requiring bidders to incur significant expense in responding to extensive bid requirements, in particular on design and operational elements; The length of the procurement process from market announcement to Financial Close with costs incurred in ensuring all stages are appropriately resourced; and The experience and expertise of the Government project team in driving the bid process, ensuring timely and effective communication and generally managing an efficient procurement process 10
Recommendations By Participants With the Participants spanning the full spectrum of PPP disciplines, the ISFU received a varied range of recommendations for reducing the amount of bid costs incurred by the private sector Category Government Team Project Scope Government Process Recommendation Appointing an experienced, highly capable and confident Project Director and project team who possess transaction process and relevant sector experience Government having a clear view on desired project outcomes and risk allocation, and consistently communicating this to bidders during all procurement stages Avoiding premature project announcements and informing the market of project release dates Government adopting a sensible procurement timetable and adhering to it at all times Preparing and releasing template EOI and RFP documents and standardised Project Documents Avoiding multiple releases of new information or addenda, especially during the RFP phase Government undertaking all necessary preparatory work prior to project release, sharing due diligence findings with all bidders, with preparatory work targeted to the requirements of bidders Enabling electronic submission of EOI and RFP submissions 11
Recommendations By Participants With the Participants spanning the full spectrum of PPP disciplines, the ISFU received a varied range of recommendations for reducing the amount of bid costs incurred by the private sector Category Information Requirements Recommendation Expressly stating if bid enhancements (like fly throughs, branded boxes/folders, 3D diagrams and glossy submissions) will not influence evaluation of bids Procuring that bidders can place reliance on consultant reports procured by Government or have the engagement of relevant consultants novated across to the successful bidder including page limits in EOI and RFP returnable schedules Evaluation Government critically evaluating RFP bid requirements before release of documents to limit requirements to information necessary for bid evaluation (and for D&C to quantify its price) 12
PPP Policies Many of the recommendations from market are generally either inherent in the process, result from inconsistent application of the level of detail required in RFP documentation and/or are directly related to the experience and capacity of the project director and the project team The application of the National and NSW PPP Guidelines: 1 2 Relies on the experience of the sponsoring agency and its ability to interpret the Guidelines and apply it to the project being procured; and The cooperation between central agencies and the procuring agency Detailed guidance required for procuring agencies to ensure: a b c Consistency in how the procurement process is undertaken and the PPP Guidelines applied by agencies; Consistency in how the procurement documentation is developed and presented, including Market Sounding, the Expression of Interest (EOI), Request for Proposals (RFP) and associated returnable schedules and project agreement; and That interaction and collaboration with central Government agencies are encouraged and roles agreed upfront 13
3 ISFU Response and Implementation 14
ISFU Response Improvements to the procurement process will aim to ensure that agencies do not release tenders to the market prematurely Procurement Process Response Response 1 Require agencies to develop a detailed program and communication plan before commencement of market engagement Response 2 Consider the establishment of a panel to enable contractors and operators prequalify for a period of 2 to 4 years Response 3 Ensure EOI requirements enable consortiums to maximise competition to appoint specialist advisors Response 4 Make provision for an intermediate interactive tender process for complex projects Response 5 Agencies to undertake 3rd party due diligence where possible and procure the services such that bidders can rely it Strictly Confidential Limited for Distribution 15
ISFU Response Procurement processes should balance the need for providing the market with sufficient certainty and an agency s realistic capacity to commence various stages of the procurement process. Procurement Process Responses (continued) Response 6 Develop a checklist to help assess if an agency is ready to commence various stages of the procurement process Response 7 Mandate electronic submissions for EOI and RFP responses and retain flexibility for items such as drawings, but consider exceptions on a project by project basis Response 8 Develop detailed interactive tender process guidance to enable greater interaction and improved refinement of bidder proposals Response 9 Consider if additional guidance on health checks should be provided Strictly Confidential Limited for Distribution 16
ISFU Response To the extent practical, tender documents should be standardised and bid requirements should be heavily scrutinised to determine what is necessary to enable bidders to price their submissions. Documentation Response Response 10 Agencies to critically assess the level of output specification for each project, clearly communicate the rationale for it and identify what is mandated Response 11 Development of templates for the EOI, RFP and RFP returnable schedules and provide guidance with respect to page limitation for returnable schedules Response 12 Develop a checklist to help agencies assess if tender requirements are at the right level to enable bidders to provide fix pricing and an underwritten bid Strictly Confidential Limited for Distribution 17
ISFU Response The expertise of the Government project team is critical to the success of the procurement process. Project Team Response Response 13 Ensure core Government expertise from central agencies are embedded in the procurement process and project teams Response 14 Determine and agree the level of central agency involvement in the project with the agency upfront Response 15 Assess the complexity of the project and assess project team capacity, capability and experience Response 16 Develop templates for the core scope of work for the commercial, financial, legal and transaction management advisors Strictly Confidential Limited for Distribution 18
Implementation Implementation of the responses will be undertaken in a number of different ways Implementation of Responses Agency consultation Consultation with agencies will be progressed where changes are made to PPP polices Review NSW PPP Guidelines A detailed review of the NSW PPP Guidelines and identification of the extent to which it requires amendment is well underway Development of templates Further detailed development and drafting of templates is currently underway Allocate resources Allocation of resources as required Cabinet approval Cabinet approval of proposed changes to the NSW PPP Guidelines will be sought Strictly Confidential Limited for Distribution 19
4 Project Deed Evolution 20 ISFU
Updating NSW Project Documents why bother?! Increase private sector confidence National alignment Enable tenderers to focus on what s important Decrease headaches and reduce bid costs New features of PPPs Outcome-based procurement Strictly Confidential Limited for Distribution 21
2016 and beyond: Emphasis on social outcomes Roads and transport $19 billion over the next five years in roads, $10 billion in public transport Culture & Sport $1.6 billion for the Stadia Strategy Education $172 million in FY2016 for major school projects Justice Capital expenditure in the Justice Cluster. 5 projects currently in the pipeline Health $1.4 billion in FY2016. $5 billion over the next four years Social Housing $550 million in the coming year, coupled with innovative funding mechanisms Strictly Confidential Limited for Distribution 22
How? Optimal risk allocation Contractual mechanics that reflect best practice Provisions that focus on outcomes not inputs Streamlining Increased importance on the partnership Strictly Confidential Limited for Distribution 23
Streamlining 1 Overarching obligations instead of repetition A single indemnity 150 page reduction Strictly Confidential Limited for Distribution 24
Key differences Output based KPIs Small number of critical service obligations Requirements (and what constitutes failure) clear and consistent Abatements: availability distinct from performance + calibration commensurate with importance Relief from abatement Intervening events Force majeure: keep debt whole (subject to insurance proceeds) Fitness for purpose The Fitness for Purpose warranty is linked to the purposes, function, uses and requirements which are current and apply as at the Date of Commercial Acceptance Default The look forward regime has been removed In the absence of a Major Default or Default Termination Event, the State s right to step in for default has been removed Strictly Confidential Limited for Distribution 25
Other differences Claims for relief and compensation Simplified Risk sharing process for capital for cost claiming of ops phase changes in law More structured approach to calculation Refinancing process Streamlined Technical Completion and Reduced Commercial consent Acceptance rights for the State Removal of State micromanagement rights Removal of State s control over: - Minor modifications - Some access, audit and monitoring rights 2 distinct phases Modifications Reviewable Services Delivery phase: Extension Events (+ Compensable Extension Events) Operations phase: Intervening Events (+ Compensable Intervening Events) Consolidated approach to notices and claims for relief (including extensions of time and delay costs) Process / plans to be agreed up front Strictly Confidential Limited for Distribution 26
Financiers Tripartite Deed Better reflects the philosophy behind the document Updated to accommodate new features of PPPs (e.g. CDPD) Structured to work for multi-source financing (e.g. USPPs) Strictly Confidential Limited for Distribution 27
Upcoming Event 28 ISFU
Social and Affordable Housing Fund: Industry Briefing Event SAHF The NSW Government is holding an industry briefing to provide information ahead of an Expression of Interest (EOI) process for the first phase of projects to be supported by the Social and Affordable Housing Fund (SAHF). Event Details Friday 11 December 2015 Wesley Conference Centre, 220 Pitt Street, Sydney Registration at 10.30am for 11.00am 12.00pm briefing followed by refreshments Pre- register: www.facs.nsw.gov.au/sahf Strictly Confidential Limited for Distribution 29
Reducing Bid Costs for Outcome-based Procurements in NSW Infrastructure and Structured Finance Unit: Partnering to Create Partnerships December 2015