21 Dec 2007

Building efficiency and effectiveness in PPP procurement

by Angela Jeppesen

Engagement of legal advisers during the development of the Business Case for proposed projects will facilitate benefits being captured for both Government and the private sector.

The market for PPPs in Australia has significantly developed over recent years, particularly in Victoria and New South Wales. Both government and private sector parties are keen to see a pipeline of projects for potential delivery as PPPs. It is important however, to ensure that Governments undertake sufficient and appropriate feasibility and business case development to ensure that only appropriate deals are put to the market for delivery as PPPs.

In this article we look at how legal advisers can assist Government during Business Case development to identify early in the procurement process key issues that may affect delivery of the project from a legal perspective, engage meaningfully with the market in relation to these issues and realise efficiencies in the procurement process.

What is the Business Case stage?

Projects being considered by Government that have satisfied preliminary feasibility studies will then move into the next stage during which a Business Case will be developed in line with the relevant Government’s procurement guidelines. The primary purpose of this preliminary stage of the project assessment is to determine whether the project should proceed in terms of Government priority and affordability[1].

The Business Case will consider alternative delivery options and identify the delivery option most likely to provide the best "value for money" outcome, whether by a PPP or traditional Government procurement [2].

Key elements of this stage of the procurement process include the Government undertaking:

  • a risk analysis and developing a Risk Allocation Matrix
  • market sounding
  • specialist studies on environmental impacts, planning approvals, cultural heritage, native title issues and legislative issues; and
  • value for money assessments of possible project delivery methods.

How can legal advisers add value?

Traditionally Government has engaged commercial and technical advisers during the Business Case development stage. However, Governments are increasingly recognising the benefits of engaging legal advisers to play a key role particularly with respect to the elements listed above.

Most recently, Clayton Utz has seen this development primarily in Victoria and Queensland where our engagement in recent projects such as North-South Bypass Tunnel, Airport Link and Northern Busway and the Victorian Government’s East-West Link Needs Assessment has been from the initial feasibility and Business Case stages.

Not only does early engagement of legal advisers ensure that Government is able to select from the best available advisers before they are engaged by the private sector[3], the Queensland Government’s Value for Money Framework recognises that it is necessary to "ensure that contract management issues are properly explored during the PPP Business Case Development Stage, and that there is a continuity of knowledge throughout the life of the project."

Identification of the legal issues impacting upon the project delivery options, risk allocation and contract structure at this early stage also allows for strategies to be developed and steps to be taken to commence addressing those issues immediately. The flow-on effects from this benefit both Government and the private sector, for example:

  • by identifying potential impacts on value for money Government is able to develop a more realistic and accurate business case (with such risks priced into the Public Sector Comparator); and
  • Government’s ability to demonstrate appropriate due diligence and consideration of any impediments to the project, as well as possible ways of addressing such
    issues before engaging with the market, will engender
    greater confidence in the private sector in both the project and Government.

These factors are critical to ensure private sector confidence to justify the high level of risk and cost of tendering for these projects and to minimise the risk of gaps in the pipeline of projects available as PPPs.

Risk Allocation Matrix

Developing the Risk Allocation Matrix involves identifying the project risks and optimally allocating such risks to the party best able to manage them. Pricing of risks on the basis of this allocation will then inform the Government’s assessment of value for money against traditional public procurement. This risk allocation will also form the basis of the proposed contractual agreements between Government and the private sector which the Government provides to short-listed bidders with its request for binding bids[4].

As PPP transactions involve complex contractual arrangements[5] the legal advisers play a key role in developing the contract structure and preparing the direct contract agreements between the Government and the private sector entity as well as reviewing the suite of contractual agreements between the private sector entity and its banks, equity providers and construction, operations and maintenance contractors.

Engaging legal advisers at the Business Case Development stage to provide strategic and legal input into the identification of risks, risk allocation and contract structure not only informs Government’s assessment of the most appropriate delivery options for the project but ensures continuity and efficiency in the development of the project documents through the procurement phase of the project.

It also gives Government the ability to engage with the market on these issues during a market sounding process if it chooses.

Market sounding

Through market sounding Government can test the private sector response to issues such as risk allocation and management, project cost estimates and contract structure[6]. Where the assessment of these issues is informed by legal input as discussed above, this can allow for:

  • more meaningful and productive engagement with the private sector during this phase
  • Government to reassess potential delivery options based upon the private sector’s response to the likely impact of such issues on their ability to do the deal; and
  • potential bidders to consider and develop innovative solutions to such issues at an early stage in turn increasing the likelihood of the Government receiving acceptable bids during the procurement process.

It is also important for legal advisers to be engaged to advise on this process to ensure that the market sounding occurs in an even-handed and transparent manner and that all parties are cognisant of probity issues[7] throughout the process to ensure future bids are not jeopardised.

Specialist studies

The commencement of specialist studies such as environmental impact assessments, consideration of potential native title and cultural heritage issues as well as identifying any legislative impediments at this early stage feeds into the analysis of risks and development of the Risk Allocation Matrix. It also affords Government the opportunity to raise any such issues during a market sounding process and engage with potential bidders on strategies for addressing or managing the issue.

On the North South Bypass Tunnel project, for example, legislative amendments were required to enable the Brisbane City Council (a Local Government) or its Concessionaire, the right to toll. Without this amendment, the NSBT Project would not have been deliverable as a PPP. Clayton Utz was able to advise Council on this fundamental constraint early in the project procurement, enabling Council to commence steps to address the issue and to engage with the market to give potential bidders comfort that the issue would be addressed and the project viable. This in turn gave bidders a degree of comfort in order to justify their significant time and cost in bidding for the project.

Early commencement of environmental studies also increases the likelihood of Environmental Impact Statements and associated project conditions being finalised at the time Government issues the Request for Proposal documents to the market, as was the case for Brisbane’s Airport Link project. This enables bidders to develop their technical solutions based on the known environmental conditions rather than being forced to incur additional costs to amend their solution to accord with conditions that are not known until well into the bid preparation phase.

Project delivery options

The analysis undertaken at the Business Case stage will set the benchmark and parameters for the ability to deliver the project through a competitive procurement process. It will be critical for Government to ensure that the procurement process is competitive and consistent with probity requirements in order to capture the anticipated value over public sector procurement.

The identification of risks and development of the Risk Allocation Matrix, feedback from the private sector through the market sounding process and the outcomes of specialist studies undertaken will form the basis of Government’s value for money assessment of alternative project
delivery options.

In addition to providing legal input into the structuring of the transaction and advising on the procurement approach to be taken legal advisers also have a role to play at this early stage in providing strategic advice to Government on governance models for the procurement, implementation and management of the project having regard to the delivery option(s) being considered and which are identified as the best value for money.

The earliest identification of legal issues relating to risks, risk allocation, market sounding and areas such as environmental assessments, native title and cultural heritage issues and legislative impediments to a project (typically risks borne by Government) as well as project delivery options, will facilitate efficiency and certainty throughout the procurement process particularly where the same legal advisers are engaged for the entire process.

Engagement of legal advisers during the development of the Business Case for proposed projects will facilitate benefits being captured for both Government and the private sector, not only for individual projects but for ongoing confidence in the market for, and delivery of, PPPs in Australia

 

[1] Public Private Partnerships, Guidance Material, Framework, PPP Guidance Material, PPP Business Case Development, Queensland Government State Development.

 

[2] Public Private Partnerships, Guidance Material, Framework, PPP Guidance Material, PPP Business Case Development, Queensland Government State Development.

 

[3] Public Private Partnerships, Guidance Material, Supporting Documents, Project Resourcing, Queensland Government State Development, August 2002.

 

[4] Public Private Partnerships, Guidance Material, Framework, PPP Guidance Material, PPP Business Case Development, Queensland Government State Development.

 

[5] Public Private Partnerships, Guidance Material, Supporting Documents, Project Resourcing, Queensland Government State Development, August 2002.

 

[6] Public Private Partnerships, Guidance Material, Framework, PPP Guidance Material, PPP Business Case Development, Queensland Government State Development.

 

[7] Public Private Partnerships, Guidance Material, Framework, PPP Guidance Material, PPP Business Case Development, Queensland Government State Development.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.