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15 Oct 2020

Spending the Federal Government's $27b investment incentive wisely by getting procurement in order

By Bruce Lloyd, Simon Brady, Joel Von Thien and Nicholas Fletcher

In considering whether to take advantage of the Federal Government's investment incentive, infrastructure owners should ensure they have robust procurement processes in place.

A key measure in the Federal Government's 2020-21 Budget released on Tuesday is a $27 billion investment incentive, described as a "game changer" for the economic recovery by Treasurer Josh Frydenberg. Aimed at bringing forward capital expenditure and stimulating the economy, this measure includes a number of instant write-off incentives for capital expenditure which will apply to businesses with a turnover of up to $5 billion until June 2022. This will enable businesses to write off the full value of any eligible capital assets acquired after Tuesday night.

The investment incentive – which will apply to both new depreciable assets and the cost of improvements to existing eligible assets – presents business with an opportunity to purchase new or upgraded assets and equipment, which may result in unprecedented demand for certain goods. In the regulated industries sector of the economy, this may involve the procurement of sophisticated equipment for owners and operators of communications networks, ports, airports, and freight and logistics infrastructure. It is an opportune time for regulated industry participants to consider the manner and terms on which any equipment is procured, and aim for best practice procurement.

Key elements of a practice procurement

Tendering is the most likely procurement route for regulated infrastructure owners and operators. An effective and competitive tender process will likely be the most effective measure to ensure a value for money procurement. An effective tender is to be preferred to contractual price parity mechanisms such as benchmarking and "most favoured customer" obligations. The process may be tailored to suit the infrastructure owner (subject to any applicable public procurement laws in the case of procurement by governments) and may involve some or all of the following steps:

  • Pre-qualification or expression of interest: it is usual for infrastructure owners to require prospective suppliers of sophisticated equipment to satisfy minimum levels of professional expertise and financial standing before they will be invited to participate in the tender.
  • Invitation to tender or request for proposal: the next step involves the infrastructure owner issuing an invitation to tender or request for proposal to pre-qualified suppliers, which contains the brief to which the supplier is to respond. The invitation to tender is usually an "invitation to treat" and not an offer to enter into a contract which is capable of acceptance. The invitation to tender usually contains the contractual terms the owner is prepared to accept.
  • Process contract: owners usually seek to avoid the creation of a process contract, or pre-award contract, which governs the conduct of the tender process, as it limits an owner's freedom in the conduct of the tender and gives legal rights to tenderers. Whether a process contract exists is to be determined from the intention of the parties and owners often seek to expressly exclude their formation. Certain indicia point to the formation of a process contract, including the supplier being required to submit an irrevocable bid and comply with comprehensive and rigorous criteria. Ultimately, whether a process contract exists will depend on the facts in each case.
  • Submission of tender and bid assessment: the form a tender must take will be set out in the invitation to tender. Depending on the existence and terms of the process contract, the submission of a tender may be simply a further step prior to executing a binding contract, or it may constitute an offer to supply certain equipment at a price that, when accepted, constitutes a binding contract. The criteria against which the bid is assessed may be contained in the process contract or remain at the discretion of the owner (so the owner is not obliged to accept an unusually low bid).
  • Acceptance of tender and contract award: assessment of bids may involve further shortlisting of tenderers, further negotiations with one or more tenderer, a period of exclusive negotiation with one tenderer, or a combination of these steps. The process and timeline may be described in the process contract or remain at the owner's discretion. Often, both parties must execute the supply agreement to form the binding contract, rather than simply the owner's acceptance of a compliant tender.
  • Letter of intent or memorandum of understanding: depending on the complexity of the procurement, the timing of the owner's requirements and the duration of the contract negotiations, the owner may require the supplier to perform certain works or services prior to the execution of the final contract. The parties may execute a "letter of intent" or "memorandum of understanding" – terms which are often used interchangeably – under which any early works or services are performed, usually subject to a financial cap. A letter of intent may have limited or no contractual effect, depending on its terms and the intention of the parties.

The appropriate tender process and whether a process contract is desirable will depend on the particular infrastructure owner, the nature of the equipment being procured and the level of competition in the market to supply the relevant equipment. There are multiple variations on steps set out above including the submission and acceptance of alternative tenders, two-stage tendering which involves owners seeking tenders based on a limited scope or specification, and many others. An owner may also elect to outsource the strategic procurement if it considers it does not have the in-house expertise to manage the size and complexity of the supply market.

What infrastructure owners should do now

In considering whether to take advantage of the Federal Government's investment incentive, infrastructure owners should ensure they have robust procurement processes in place. This process begins with determining the appropriate procurement route, of which tendering is an attractive option for the reasons set out above.

Infrastructure owners should also ensure the material terms of the proposed equipment supply contract are well developed prior to commencing any procurement process. This will ensure owners avoid delays and unnecessary costs in negotiating the terms of the final contract.

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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.